BK Technologies Corporation — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components under the BK Radio and RELM brands. The company primarily serves government, public safety, business and industrial markets. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Dollar amounts are in thousands unless otherwise noted.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $10,889 | $7,644 | Up 42.5% |
| Gross margin | 35.8% | 31.9% | Up 3.9 percentage points |
| SG&A expense | $4,743 | $4,755 | Down 0.3% |
| Operating loss | $(848) | $(2,318) | Improved 63.4% |
| Net loss | $(1,192) | $(1,318) | Improved $126 |
| Basic and diluted loss per share | $(0.09) | $(0.10) | Improved |
| Cash provided by operating activities | $915 | $(2,308) | Improved $3,223 |
| Capital expenditures | $131 | $829 | Down $698 |
Sales growth was driven primarily by strong federal demand, including U.S. Forest Service and Bureau of Land Management activity. U.S. government agencies represented $6,576, or 60.4%, of Q1 2020 sales, compared with $5,401, or 70.7%, in Q1 2019.
Gross profit was approximately $3,895, compared with $2,437 in the prior-year quarter. Margin benefited from higher sales volume but remained below typical levels because of product mix, increased freight costs, lower manufacturing volumes and suboptimal overhead absorption. SG&A was essentially flat in dollars but declined substantially as a percentage of sales to 43.6% from 62.2%.
Operating results included a $306 unrealized loss on the company’s investment in 1347 Property Insurance Holdings, compared with a $592 unrealized gain in Q1 2019. No income tax benefit was recorded in Q1 2020, compared with a $355 tax benefit in the prior-year period. The company reported net deferred tax assets of $4,373 and stated that future losses could require a valuation allowance.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $4,946 at March 31, 2020, compared with $4,676 at December 31, 2019.
- Working capital was approximately $13.7 million at March 31, 2020, versus $14.5 million at year-end 2019.
- Operating cash flow of $915 was primarily supported by a $2,538 reduction in inventory. Inventory declined to $10,937 from $13,513 at December 31, 2019.
- The company had no borrowings outstanding under its $5.0 million JPMorgan revolving credit facility and reported approximately $3.2 million of availability at the filing date. The facility expires January 31, 2021 and requires tangible net worth of at least $20.0 million at each fiscal quarter-end.
- The company was in compliance with its credit facility covenants as of March 31, 2020 and the filing date.
- A separate equipment financing agreement had an original principal amount of $425, a fixed interest rate of 5.11% and a five-year term.
- Financing cash outflows included $252 of dividends, $243 of share repurchases and $19 of debt repayment.
- Purchase commitments for inventory totaled approximately $7,062 at March 31, 2020.
Material Changes, Outlook and Unusual Items
- COVID-19 had limited impact on Q1 orders, but management expects the pandemic to adversely affect future revenues, operations, cash flow and financial condition. The company remained open as an essential business, while experiencing supply-chain delays and increased freight costs.
- On May 4, 2020, the company reduced its workforce by approximately 18%, including a roughly 21% reduction in manufacturing employment and a 15% reduction in SG&A employment. Approximately $221 of severance costs are expected to be recognized in Q2 2020 and paid over five months.
- The anticipated BKR Series product launch was delayed from 2019 and was expected to begin in Q2 2020. The timing of the multiband product launch remains uncertain and could be further delayed by COVID-19.
- The company received approximately $2,196 under the Paycheck Protection Program on April 13, 2020, but initiated repayment on April 24 after new SBA guidance created uncertainty regarding eligibility.
- The quarterly dividend was $0.02 per share and was paid on April 13, 2020. The stock repurchase program terminated in April 2020 and was not renewed.
- Fundamental Global Investors entered into a Rule 10b5-1 plan effective April 2, 2020 to purchase up to one million BK Technologies shares. Related-party affiliations exist between Fundamental Global and several company directors.
- The company reported no pending material legal claims as of March 31, 2020. The company’s investment in PIH had a fair value of $2,329 at quarter-end, versus an original purchase cost of approximately $3,741.
Key Risks and Contingencies
Primary risks include the duration and severity of COVID-19, supply-chain disruption, reduced government or public-safety spending, customer concentration, dependence on U.S. government contracts, fixed-price contract exposure, product launch delays, competition, technology changes, reliance on suppliers and contract manufacturers, cybersecurity risks, inventory levels, use of deferred tax assets and access to capital. Management stated that future COVID-19 effects cannot presently be predicted.
Investor Verification Items
- Verify the sustainability of the 42.5% sales increase, particularly the contribution from U.S. Forest Service and other federal orders and the unusually weak Q1 2019 comparison.
- Monitor whether gross margins improve from 35.8% despite product mix, freight costs and manufacturing under-absorption.
- Assess the cash-flow quality of the $915 operating inflow, which was substantially supported by inventory reduction.
- Confirm the timing, customer adoption and profitability of the BKR Series and multiband product launches.
- Track COVID-19 effects on orders, suppliers, production, collections and liquidity, including the impact of the workforce reductions and $221 severance charge.
- Review compliance with the $20.0 million tangible-net-worth covenant and availability under the revolving credit facility.
- Evaluate the recoverability of the $4,373 deferred tax asset if future losses continue.