BK Technologies Corp. (filed as RELM Wireless Corporation) — Q2 2015 Form 10-Q
Business context and reporting period
The filing is for the quarter and six months ended June 30, 2015. The registrant name in the filing is RELM Wireless Corporation, which designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands. The filing metadata identifies BK Technologies Corp.; investors should verify the issuer identity and corporate-name history.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $6.589 million | $9.057 million | $15.166 million | $16.882 million |
| Gross margin | 36.2% | 42.8% | 40.0% | 41.6% |
| Operating income | $107,000 | $1.038 million | $848,000 | $1.640 million |
| Net income | $78,000 | $672,000 | $617,000 | $1.147 million |
| Diluted EPS | $0.01 | $0.05 | $0.04 | $0.08 |
| Operating cash flow | Not separately provided | Not separately provided | $581,000 | $1.419 million |
- Q2 sales declined 27.2%; six-month sales declined 10.2%.
- P25 digital-product sales declined 37.9% in Q2 to approximately $4.1 million and 15.0% for the six-month period to approximately $10.4 million.
- SG&A decreased in absolute dollars but increased as a percentage of sales to 34.6% in Q2 and 34.4% for six months, versus 31.3% and 31.9%, respectively, in the prior-year periods.
- Cash and cash equivalents were $11.678 million at June 30, 2015, versus $11.363 million at December 31, 2014. Working capital was approximately $29.8 million, compared with $28.9 million at year-end.
- Total assets were $37.901 million and total liabilities were $3.959 million at June 30, 2015. Stockholders’ equity was $33.942 million.
- The company had no borrowings under its secured revolving credit facility. The facility had a $5.0 million maximum, subject to borrowing-base limitations, with approximately $2.127 million available at June 30, 2015.
- Capital expenditures were $342,000 for the six months ended June 30, 2015. Financing cash flow of $76,000 primarily reflected stock-option exercises.
Material changes versus the prior comparable period
- Lower demand from federal, state and local public-safety agencies, including the wildland-fire market, reduced sales. International public-safety orders received in the first quarter were not repeated in Q2.
- Gross margin contracted because of an unfavorable product mix, early production costs for new products, lower manufacturing volumes and reduced absorption of fixed manufacturing costs.
- Operating income fell 90% in Q2 and 48% for the six-month period, primarily due to lower sales and gross margins.
- Net income fell 88% in Q2 and 46% for the six-month period.
- Operating cash flow fell from $1.419 million to $581,000, while cash still increased because investing and financing uses were modest.
- Inventory increased to $12.339 million from $12.112 million at year-end, while deferred tax assets declined to approximately $5.785 million from $6.033 million.
Guidance, outlook, risks and unusual items
- Management reported increased quoting activity and said significant sales prospects remained viable, but provided no quantitative revenue or earnings guidance.
- Management expects subsequent production runs to reduce material costs and improve labor efficiency, and believes higher volumes and manufacturing efficiencies could improve gross margins. These expectations are subject to competitive pricing and product-cost pressures.
- Government procurement timing remains unpredictable because of agency budgets and funding priorities. Government agencies represented 31.1% of Q2 sales and 41.2% of six-month sales.
- The company expects cash, operating cash flow and revolver availability to fund working-capital needs for the foreseeable future, but cautioned that economic conditions could restrict access to credit or capital.
- The company reported no pending material legal claims as of June 30, 2015. Supplier purchase orders totaled approximately $4.616 million.
- Management concluded that the $5.785 million net deferred tax asset was more likely than not realizable, but future losses could require a valuation allowance. Federal and state NOLs were approximately $5.476 million and $14.032 million, respectively, with expirations beginning in 2018.
- In July 2015, the company purchased approximately $2.6 million of stock in a public company through a new wholly owned subsidiary, representing a non-controlling interest. The investment was expected to be recorded as a non-current asset in Q3 2015, with no material Q3 income-statement impact anticipated.
- Disclosure controls and procedures were reported effective as of June 30, 2015, with no material changes in internal control over financial reporting.
Investor verification priorities
- Verify the issuer’s identity, including the relationship between the filing’s RELM Wireless Corporation name and the requested BK Technologies Corp. name.
- Assess whether the decline in public-safety and P25 demand was temporary or reflects a sustained change in government procurement.
- Monitor gross-margin recovery, manufacturing volumes, new-product production costs and competitive pricing.
- Reconcile the company’s liquidity with the revolver’s borrowing-base availability and its December 31, 2015 maturity.
- Evaluate the realizability of deferred tax assets and the effect of any future valuation allowance.
- Review the July 2015 $2.6 million strategic investment, including its valuation, liquidity and non-controlling-interest risks.