Business Context and Reporting Period
This Form 10-K covers RELM Wireless Corporation, the predecessor name of BK Technologies Corp., for the fiscal year ended December 31, 2014. The company designs, manufactures and markets two-way land-mobile-radio equipment, including portable and mobile radios, repeaters, base stations and related components. Its primary markets are government/public safety and business/industrial customers, with approximately 95% of 2014 sales from government and public safety.
Products include analog equipment and Project 25-compliant digital radios, particularly the BK Radio KNG product line. The company operates as one reportable segment and relies substantially on contract manufacturers and external component suppliers.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $31.0 million | $27.0 million | +14.6% |
| P-25 digital sales | $22.4 million | $17.7 million | +26.6% |
| Gross profit margin | 42.6% | 43.5% | Down 0.9 percentage points |
| SG&A expense | $10.7 million | $10.1 million | +5.5% |
| Operating income | $2.5 million | $1.6 million | +52.3% |
| Income before taxes | $2.5 million | $1.7 million | +52.3% |
| Net income | $1.6 million | $1.1 million | +42.1% |
| Basic and diluted EPS | $0.12 | $0.08 | Improved |
| Cash flow from operations | $4.0 million | $2.0 million | +99.5% |
Gross margin declined because of product mix, competitive pricing pressure and lower manufacturing absorption early in the year, although management reported improvement through the year. SG&A declined to 34.4% of sales from 37.4% in 2013. The effective tax rate increased to 35.68% from 31.09%; most tax expense was deferred and non-cash.
At December 31, 2014, cash and cash equivalents were $11.4 million, total current assets were $32.4 million, working capital was approximately $28.9 million and total liabilities were $3.8 million. Net inventories were $12.1 million, including a $1.7 million reserve for obsolete and slow-moving inventory. The company had no borrowings outstanding under its secured revolving credit facility and reported approximately $3.0 million of borrowing availability, subject to the borrowing base.
Investing cash outflows were $697,000, primarily for property, plant and equipment. Financing cash inflows were $144,000 from stock-option exercises. The company paid no cash dividends in 2014 or 2013.
Material Changes Versus the Prior Comparable Period
- Sales increased by $3.9 million, driven predominantly by P-25 digital and KNG product sales to new federal, state and local government customers, international customers and certain legacy accounts.
- P-25 products increased to 72.3% of sales from 65.4% in 2013.
- Backlog increased to approximately $4.2 million at year-end from $2.5 million.
- Operating profitability improved materially despite the lower gross margin, primarily because of higher sales and lower SG&A as a percentage of revenue.
- Cash increased to $11.4 million from $7.9 million, while operating cash flow increased to $4.0 million from $2.0 million.
- Inventory increased by approximately $537,000, reflecting higher business volumes and purchases of long-lead components; the obsolete-inventory reserve declined to $1.7 million from $3.0 million after disposal of fully reserved inventory.
- Capitalized software declined to $753,000 from $1.5 million, principally due to amortization.
- The secured credit facility was amended and its maturity extended to December 30, 2015. The amendment reset the minimum tangible-net-worth covenant to $26.5 million, subject to specified increases.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Management stated that 2014 offered encouraging signs that government funding conditions and customer awareness of the company’s value proposition were improving. It expects cash, operating cash flow and available credit to fund foreseeable working-capital needs, but does not provide assurance regarding future results.
- The company competes in a mature, technology-driven market dominated by Motorola Solutions, which was estimated to hold more than half of the LMR market. Successful development and market acceptance of new digital products remain critical.
- Approximately 40% of 2014 sales were to the U.S. Government, creating exposure to appropriations, competitive bidding, procurement delays, political developments and customer concentration.
- Approximately 69% of 2014 material, subassembly and product procurements were sourced internationally, and approximately 52.5% of procurement was sourced from one supplier. Disruption, price increases or delays could affect production and deliveries.
- The company depends on a limited number of contract manufacturers and has no guaranteed supply arrangements. Some components have lead times of up to six months.
- Government spending and wildland-fire activity create seasonal fluctuations, generally favoring the second and third quarters and causing volatility in quarterly sales and cash flow.
- The company had approximately $6.0 million of net deferred tax assets, primarily related to net operating loss carryforwards. Realization depends on generating sufficient future taxable income; future losses could require a valuation allowance.
- As of year-end, the company had approximately $2.9 million of inventory purchase commitments and $3.1 million of future minimum lease payments. It also had standard two-year product warranty obligations, with a year-end accrued warranty liability of $384,000.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded that disclosure controls and internal control over financial reporting were effective.
- The FASB revenue-recognition standard issued in 2014 was not yet effective; the company was evaluating its potential impact.
Investor Verification Items
- Verify the issuer identity and corporate name history, because the filing is under RELM Wireless Corporation while the requested company is BK Technologies Corp.
- Reconcile the stated $3.0 million credit availability with the facility’s $5.0 million maximum and borrowing-base limitations, and review covenant compliance and the December 2015 maturity.
- Assess the sustainability of the 2014 sales increase, backlog growth and P-25/KNG product adoption, particularly given government concentration and seasonality.
- Review gross-margin trends by product mix and quarter, including the reported improvement from the first to fourth quarter.
- Evaluate inventory liquidity, the remaining $1.7 million obsolete-inventory reserve and dependence on long-lead or single-source components.
- Assess the realizability and expiration profile of the deferred tax assets and federal and state NOL carryforwards.
- Review supplier, contract-manufacturer, warranty, purchase-commitment and lease exposures disclosed in the notes.