BK Technologies Corporation — Q3 2019 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 products under the BK Radio and RELM brands. The company serves government, public safety, business and industrial customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
On March 28, 2019, BK Technologies Corporation became the holding-company parent of BK Technologies, Inc. Management reported no material operational or financial impact from the reorganization. The company had 12.7 million common shares outstanding at September 30, 2019.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $11.8 million | $13.3 million | $32.7 million | $38.7 million |
| Gross margin | 43.3% | 41.1% | 40.4% | 41.8% |
| Operating income (loss) | $0.3 million | $0.9 million | $(2.0) million | $3.0 million |
| Net income (loss) | $0.2 million | $0.7 million | $(1.3) million | $1.2 million |
| Basic and diluted EPS | $0.02 | $0.05 | $(0.10) | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $1.0 million | $2.6 million |
- Q3 SG&A was $4.8 million, or 40.8% of sales; nine-month SG&A was $15.2 million, or 46.6% of sales.
- Engineering and product development expense was $2.4 million in Q3 and $7.6 million for the nine months, up from $2.1 million and $5.8 million, respectively, in the comparable 2018 periods.
- Cash and cash equivalents were $8.8 million at September 30, 2019, down from $11.3 million at December 31, 2018. Working capital was approximately $17.1 million, versus $21.0 million at year-end 2018.
- Inventories increased to $14.5 million from $11.5 million at December 31, 2018, while trade receivables declined to $2.9 million from $5.7 million.
- Net cash used in investing activities was $2.3 million, primarily for $2.3 million of property, plant and equipment purchases. Net cash used in financing activities was $1.1 million, including $0.8 million of dividends and $0.8 million of share repurchases.
- Total liabilities were $15.9 million and stockholders’ equity was $25.0 million at September 30, 2019.
Debt and Liquidity
- The company had no borrowings under its $1.0 million Silicon Valley Bank revolving credit facility at September 30, 2019 and reported full availability. The facility matured December 26, 2019, bears interest at prime plus 25 basis points when drawn, and is secured by substantially all operating subsidiary assets.
- The company entered into a five-year, $425,000 equipment loan on September 25, 2019, bearing fixed interest of 5.11% and secured by the financed equipment. The balance included $77,000 current and $348,000 long-term at September 30, 2019.
- Management stated that the company was in compliance with its debt covenants and believed cash, expected operating cash flow and available borrowing capacity were sufficient for foreseeable working capital needs.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 11.3% year over year, and nine-month sales declined 15.4%. Management attributed the decline primarily to weaker sales to California state and Canadian public safety agencies, the federal government shutdown, and sluggish state and local government demand.
- Q3 gross margin improved by 220 basis points due to product mix, unit costs and pricing, but nine-month gross margin declined 140 basis points because of weak first-quarter volumes and under-absorption of manufacturing costs.
- Q3 operating income declined to $295,000 from $878,000, while the nine-month period moved from $3.0 million of operating income to a $2.0 million operating loss.
- Higher engineering and product development spending, including investment in new portable and mobile radios and a multi-band product, contributed to the operating loss.
- Cash from operations declined to $1.0 million from $2.6 million, while inventory increased $3.1 million during the 2019 nine-month period.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $2.6 million of right-of-use assets and lease liabilities. The adoption affected the balance sheet but did not materially change operating lease expense.
Outlook, Commentary, Risks and Unusual Items
- No quantitative revenue or earnings guidance was provided in the filing. Management cited a pipeline of potential federal, state and local public safety customers and expected sales growth and new products to support future gross margins.
- The company began developing a new radio line expected to succeed the current KNG line in the first half of 2020.
- Design changes to the multi-band product made its launch timing uncertain; management anticipated market introduction in the second half of 2020.
- The Transportation Security Administration exercised a one-year option through September 27, 2020, with authority to purchase up to $2.0 million of products. A firm order of approximately $1.8 million was placed, of which $211,000 had shipped by September 30, 2019 and the remainder was expected in Q4 2019.
- Government agencies represented 72.7% of Q3 sales and 55.0% of nine-month sales, compared with 53.5% and 41.0%, respectively, in 2018. This concentration creates exposure to government budgets, shutdowns, procurement timing and allocation among approved suppliers.
- The company recognized a $258,000 unrealized loss on its PIH investment in Q3 and a $186,000 unrealized gain for the nine-month period. The investment had a September 30 fair value of $2.1 million.
- Net deferred tax assets were approximately $3.9 million. Their realization depends on generating sufficient future taxable income; additional valuation allowances could be required if the company incurs further losses.
- Purchase commitments to suppliers were approximately $6.2 million. The filing reported no pending material legal claims or matters.
- Key disclosed risks include technology and product development, competition, government spending, contract manufacturers and suppliers, inventory levels, debt and covenant compliance, tax-asset realization, cybersecurity, tariffs, personnel retention and the company’s dependence on subsidiary cash flows as a holding company.
Most Important Facts for Investors to Verify
- Whether sales recover following the federal shutdown-related disruption and weakness in state, local and international public safety markets.
- Whether the new KNG successor radio line launches in the first half of 2020 and achieves expected customer adoption and margins.
- The revised timing, development costs and commercial prospects of the multi-band product.
- Inventory conversion, operating cash flow and the company’s ability to avoid further working-capital pressure.
- Renewal or refinancing of the $1.0 million revolving credit facility after its December 26, 2019 maturity date.
- Reliability of the company’s tax-asset realization assumptions and potential valuation-allowance exposure.
- Customer concentration, particularly the dependence on U.S. government agencies and the TSA contract.