BK Technologies Corp. 2020 Form 10-K Summary
Business context and reporting period
BK Technologies Corporation is a holding company whose operating subsidiary designs, manufactures and markets American-made two-way land mobile radios, repeaters, base stations and related components. Products serve government, public safety, military, commercial and industrial customers, with digital products primarily compliant with the APCO Project 25 standard. The filing covers the fiscal year ended December 31, 2020, with comparisons to 2019.
- Government and public safety customers represented approximately 92% of 2020 sales, compared with 93% in 2019.
- U.S. Government sales represented approximately 50.5% of 2020 sales, compared with 49.1% in 2019.
- The company had 95 employees at December 31, 2020 and operated as a single reportable business segment.
Financial performance and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $44.139 million | $40.100 million | Up 10.1% |
| Gross profit margin | 41.0% | 39.0% | Up 2.0 percentage points |
| SG&A expense | $17.036 million | $20.036 million | Down 15.0% |
| Operating income (loss) | $1.048 million | $(4.385) million | Improved $5.433 million |
| Other expense, net | $(797,000) | $762,000 income | Unfavorable $1.559 million |
| Net income (loss) | $248,000 | $(2.636) million | Improved $2.884 million |
| Basic and diluted EPS | $0.02 | $(0.21) | Improved |
| Net cash from operating activities | $4.444 million | $(2.486) million | Improved $6.930 million |
- Gross margin benefited primarily from a more favorable product mix, higher production volumes and lower manufacturing costs.
- Engineering and product development expense declined to $7.869 million from $9.803 million, as development shifted from external resources to the internal engineering team.
- The $620,000 unrealized loss on the company’s investment in FG Financial Group contrasted with a $716,000 unrealized gain in 2019.
- Cash and cash equivalents were $6.826 million at year-end, compared with $4.676 million in 2019.
- Inventory declined to $9.441 million from $13.513 million, a reduction of approximately $4.1 million.
- Total assets were $37.490 million and stockholders’ equity was $22.524 million at December 31, 2020.
Debt, liquidity and capital allocation
- The company had no borrowings outstanding under its $5.0 million JPMorgan Chase revolving credit facility at December 31, 2020; approximately $5.0 million was available, subject to borrowing-base limitations.
- The facility was amended in January 2021 and extended through January 31, 2022. It includes a tangible-net-worth covenant requiring at least $20.0 million and restrictions on dividends, indebtedness, liens, acquisitions, asset sales and stock repurchases.
- The company reported compliance with all credit-facility covenants as of December 31, 2020 and the filing date.
- The company received and repaid a $2.196 million Paycheck Protection Program loan during 2020.
- Operating cash flow funded $946,000 of capital expenditures, approximately $1.002 million of dividends and $269,000 of stock repurchases.
- Four quarterly dividends of $0.02 per share were declared and paid during 2020. The one-million-share repurchase program was completed in April 2020 and was not renewed.
Material changes versus the prior comparable period
- Sales increased $4.039 million, primarily from federal and state public safety agencies, new customers and initial sales of the BKR 5000 portable radio.
- Operating results moved from a $4.385 million loss to $1.048 million of operating income, reflecting sales growth, margin expansion and cost reductions.
- SG&A declined by $3.0 million, including lower engineering, sales and marketing costs and workforce-related savings.
- The company reduced its workforce by approximately 18% in the second quarter and recognized approximately $221,000 of severance expense.
- Backlog declined to approximately $5.9 million at year-end from $7.2 million at year-end 2019.
- Cash from operations turned positive, primarily because of net income and the inventory reduction program, partly offset by a $2.5 million increase in accounts receivable.
- International sourcing declined to approximately 53% of material, subassembly and product procurements from 67% in 2019, although supplier concentration remained significant.
Outlook, commentary, risks and unusual items
- Management planned additional BKR Series models, including multiband products, for 2021 and beyond. The success and timing of the product transition are uncertain.
- Management stated that cash, expected operating cash flow, cost-saving measures and available borrowing capacity should be sufficient for foreseeable working-capital needs.
- COVID-19 did not materially disrupt 2020 manufacturing operations, but the company experienced supply-chain delays and higher freight costs and warned that future effects on orders, manufacturing, collections and cash flow remain uncertain.
- Key risks include dependence on LMR products, intense competition led by Motorola Solutions, reliance on U.S. Government spending and contracts, government audits and termination rights, supplier and contract-manufacturer concentration, inventory obsolescence, fixed-price contracts and technology transitions.
- Approximately 65% of 2020 material, subassembly and product procurements came from six suppliers, and certain components had single sources.
- The company held 477,282 shares of FG Financial Group with a year-end fair value of approximately $2.014 million and recorded a $620,000 unrealized loss in 2020.
- Net deferred tax assets were approximately $4.3 million after a $98,000 valuation allowance. Future losses or insufficient taxable income could require additional valuation allowances.
- Purchase commitments for inventory totaled approximately $8.317 million at December 31, 2020. No material legal claims were pending at year-end.
- The independent auditor issued an unqualified opinion. Critical audit matters included inventory obsolescence allowances and realizability of deferred tax assets.
Most important facts for investors to verify
- Whether the BKR Series, particularly planned multiband products, launches on schedule and gains customer acceptance.
- Whether sales growth and the 41.0% gross margin are sustainable after 2020 government orders and product-mix benefits.
- The company’s continuing exposure to U.S. Government budgets, procurement decisions, audits and contract cancellations.
- COVID-19 effects on supplier lead times, freight costs, customer demand, collections and future operating cash flow.
- Inventory aging and obsolescence risk, including the $9.441 million inventory balance and $520,000 related allowance.
- Compliance with the $20.0 million tangible-net-worth covenant and the availability of the $5.0 million revolving facility through January 2022.
- The recoverability of the $4.3 million net deferred tax asset and the potential for additional valuation allowances.
- The effect of the company’s $2.014 million investment in FG Financial Group and related-party governance considerations involving Fundamental Global affiliates.