BK Technologies, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 7, 2018. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components for government, public safety, business and industrial customers. The company changed its name from RELM Wireless Corporation to BK Technologies, Inc. in June 2018 and began trading under ticker BKTI.
Financial Results and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $13.3 million | $11.8 million | $38.7 million | $30.0 million |
| Gross margin | 41.1% | 32.3% | 41.8% | 35.2% |
| Operating income (loss) | $878,000 | $157,000 | $3.0 million | $(76,000) |
| Net income | $650,000 | $600,000 | $1.15 million | $650,000 |
| Diluted EPS | $0.05 | $0.04 | $0.09 | $0.05 |
- Q3 sales increased 12.4%; nine-month sales increased 29.1% year over year.
- Q3 operating margin was approximately 6.6%, versus 1.3% in the prior-year quarter. Nine-month operating margin was approximately 7.6%, versus negative 0.3% in 2017.
- SG&A was $4.6 million in Q3 and $13.2 million for the nine months. Engineering and product-development expense increased to $2.1 million in Q3 and $5.8 million for the nine months due to new product initiatives.
- Other expense included a $191,000 Q3 and $543,000 nine-month unrealized loss on the company’s investment in 1347 Property Insurance Holdings. The nine-month period also included an approximately $849,000 loss on the sale of Iteris securities.
- Net cash provided by operating activities was $2.6 million for the nine months, compared with cash used of $245,000 in the prior-year period.
- Cash and cash equivalents were $11.3 million at September 30, 2018, compared with $7.1 million at December 31, 2017. Working capital was approximately $23.6 million.
- Investing cash flow was $3.5 million, including $8.3 million of proceeds from securities sales, $3.7 million invested in FGI 1347 Holdings and $1.1 million of capital expenditures.
- Financing cash flow used $2.0 million, including $815,000 of dividends and $1.2 million of common-stock repurchases.
- The company had no borrowings under its secured revolving credit facility, which provided $1.0 million of availability and matured December 26, 2018. Management stated that liquidity was sufficient for foreseeable working-capital requirements.
Material Changes Versus Prior Comparable Period
- Sales growth and a more favorable product mix, higher production volumes and manufacturing-quality improvements increased gross margins by 8.8 percentage points in Q3 and 6.6 percentage points for the nine months.
- Operating results improved substantially, with the nine-month operating loss in 2017 converting to $3.0 million of operating income in 2018.
- Net income increased 8.3% in Q3 and 77.4% for the nine months, despite investment-related losses in 2018 and a $1.3 million investment gain in the prior-year nine-month period.
- Inventory declined $3.7 million during the first nine months to $10.7 million, while accounts receivable increased to $7.4 million.
- The company repurchased 140,464 shares during Q3 at an average price of $3.77, leaving 506,782 shares available under its one-million-share repurchase authorization at September 30.
- Adoption of ASU 2016-01 reclassified approximately $4.3 million of unrealized investment gains from accumulated other comprehensive income to accumulated deficit. Adoption of ASC 606 had no material effect on reported revenue or opening retained earnings.
Outlook, Commentary, Risks and Unusual Items
- Management described the sales prospect funnel for the remainder of 2018 and into 2019 as promising, supported by new multi-band products and efforts to expand state and local market share.
- The company planned to introduce the first model in its multi-band product line later in 2018.
- The company received approximately $800,000 of initial task orders under a U.S. Army SURAC contract. The contract has a stated maximum value of $495 million over five years, but it does not guarantee additional orders or specify supplier purchase quantities.
- The TSA exercised a one-year option through September 27, 2019, providing for up to $2.0 million of products, and separately ordered approximately $2.0 million of equipment and services. Delivery timing and quantities remain unspecified.
- U.S. government agencies represented 53.5% of Q3 sales and 41.0% of nine-month sales, creating exposure to government budgets, procurement timing and allocation among approved suppliers.
- Purchase commitments to suppliers totaled approximately $6.9 million at September 30, 2018.
- The company settled litigation with former sales representative The Sales Group. It paid $682,000 of commissions during the nine months and recorded an additional estimated $290,000 obligation for the remainder of 2018.
- Net deferred tax assets were approximately $3.1 million, supported primarily by federal and state NOLs. Management concluded that approximately $83,000 was more likely than not unrealizable because of insufficient Florida taxable income; additional valuation allowances may be required if future losses occur.
- Key risks include technology changes, competition, reliance on contract manufacturers and government customers, product-development execution, inventory and supplier exposure, use of deferred tax assets, currency losses on Canadian contracts, cybersecurity, capital-market access and maintenance of the NYSE American listing.
Investor Verification Priorities
- Verify whether the improved gross margins and operating profitability are sustainable after the favorable product mix and volume benefits.
- Track fulfillment and follow-on awards under the U.S. Army SURAC and TSA contracts; neither contract guarantees future order volumes.
- Review the valuation and related-party governance of the PIH investment held through FGI 1347 Holdings, including the $3.2 million fair value and associated unrealized losses.
- Assess concentration in U.S. government sales, customer receivables and exposure to federal, state and local budget constraints.
- Monitor the company’s deferred tax asset realizability, NOL expiration periods and potential future valuation allowances.
- Confirm the status and terms of the revolving credit facility after its December 26, 2018 maturity date.
- Evaluate cash requirements from supplier purchase commitments, product-development spending, dividends, stock repurchases and potential litigation-related commissions.