BK Technologies Corporation — Q1 2021 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, primarily for government and public-safety customers. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company is a smaller reporting company and operates through wholly owned BK Technologies, Inc.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $8.564 million | $10.889 million |
| Gross profit margin | 36.2% | 35.8% |
| Operating loss | $877,000 | $848,000 |
| Other income (expense) | $183,000 | $(344,000) |
| Net loss | $694,000 | $1.192 million |
| Basic and diluted loss per share | $0.06 loss | $0.09 loss |
| Cash flow from operating activities | $39,000 | $915,000 |
| Capital expenditures | $1.031 million | $131,000 |
Cash and cash equivalents were $6.363 million at March 31, 2021, compared with $6.826 million at December 31, 2020. Working capital was approximately $13.2 million, compared with $15.1 million at year-end 2020. Inventories increased to $10.511 million from $9.441 million, while trade receivables declined to $4.566 million from $6.466 million.
Total liabilities were $15.172 million and stockholders’ equity was $21.714 million at March 31, 2021. The company had $800,000 outstanding under its revolving credit facility, with reported net availability of approximately $3.387 million at quarter-end. The facility bears interest at one-month LIBOR plus 1.90%, matures January 31, 2022, and requires tangible net worth of at least $20 million. The company reported compliance with all covenants.
Material Changes Versus the Prior Comparable Period
- Sales declined $2.325 million, or approximately 21.4%, primarily because anticipated orders from existing federal customers were delayed. Management believes these remain prospective opportunities.
- Gross margin improved modestly to 36.2% from 35.8%; however, a one-time reserve for the legacy KNG product line reduced Q1 2021 margin by approximately 3.3 percentage points. Excluding that reserve, management estimated margin at approximately 39.5%.
- SG&A expense declined $770,000, or 16.2%, to $3.973 million, reflecting workforce and spending reductions implemented in 2020. The reduction did not offset the impact of lower sales on operating results.
- Operating loss increased slightly to $877,000 from $848,000, while the operating-loss margin worsened to 10.2% from 7.8%.
- Net loss improved primarily because the company recorded a $205,000 unrealized gain on its investment in FG Financial Group, compared with a $306,000 unrealized loss in Q1 2020.
- Operating cash flow fell to $39,000 from $915,000. Inventory growth of approximately $1.4 million and lower deferred revenue were significant uses of operating cash, partly offset by receivable collections.
- Investing cash use increased to $1.031 million, primarily for manufacturing equipment. Financing cash flow was positive $529,000, including $800,000 of credit-facility borrowings and approximately $250,000 of dividends paid.
- U.S. government agencies represented 24.7% of Q1 2021 sales, or approximately $2.116 million, compared with 60.4%, or approximately $6.576 million, in Q1 2020.
Outlook, Risks, Contingencies and Unusual Items
- Management expects continued uncertainty from COVID-19, government budgets and procurement timing. Manufacturing operations remained open, but the company cannot isolate the pandemic’s precise effect on quarterly results.
- Worldwide shortages of semiconductors and integrated circuits have caused limited supplies, longer lead times and increased costs. Management stated that shortages could continue for several quarters or years and could impair production, sales, cash flow and margins.
- The company launched the BKR 5000 in the second half of 2020 and plans additional BKR Series products, including multiband products. The timing and commercial success of these products remain uncertain.
- Purchase commitments for inventory totaled approximately $9.540 million at March 31, 2021, while inventory obsolescence allowances increased to approximately $809,000 from $520,000 at year-end 2020.
- The company held approximately 477,282 shares of FG Financial Group with a fair value of $2.219 million and recognized a $205,000 unrealized gain during the quarter. The investment creates exposure to market-value fluctuations and related-party governance considerations.
- The company had approximately $4.3 million of net deferred tax assets and concluded that it could not currently generate sufficient taxable income to realize the entire balance; a $98,000 valuation allowance was recorded. Additional valuation allowances may be required if future losses continue.
- No material legal claims were pending at March 31, 2021. The company declared a quarterly dividend of $0.02 per share, paid April 26, 2021; credit-agreement restrictions may limit future dividends.
- On April 6, 2021, the company entered into a $743,000 equipment loan bearing fixed interest at 3.0%, payable over 48 monthly installments beginning May 2021 and maturing April 2025.
- Management stated that cash, cost reductions, anticipated operating cash flow and available borrowing capacity should meet foreseeable working-capital needs, while cautioning that market conditions could limit access to additional capital.
Important Facts for Investors to Verify
- Whether delayed federal orders convert into sales in subsequent quarters and whether government customer concentration increases again.
- Inventory levels, purchase commitments and obsolescence reserves, particularly in light of semiconductor shortages and the KNG product-line reserve.
- Availability under and covenant compliance with the revolving credit facility before its January 31, 2022 maturity.
- The sustainability of cost reductions and whether they can offset lower volumes without impairing product development or sales execution.
- Commercial adoption, launch timing and development costs for the BKR Series, including planned multiband products.
- Cash generation after capital expenditures, dividends and new equipment financing.
- Realizability of the $4.3 million deferred tax asset and any future valuation-allowance changes.
- Volatility and governance implications associated with the FG Financial Group investment and its related-party relationships.