BK Technologies Corporation — Form 10-Q Summary
Business Context and Reporting Period
BK Technologies Corporation, through BK Technologies, Inc., provides public-safety communications products and services. Its principal businesses are two-way land mobile radios and a developing SaaS smartphone-application business. The filing covers the unaudited three and six months ended June 30, 2022, compared with the corresponding 2021 periods. Dollar amounts are generally in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net sales | $12.1 million | $11.3 million | $18.7 million | $19.9 million |
| Gross margin | 14.2% | 38.4% | 17.1% | 37.6% |
| Operating loss | $(3.7) million | $(0.2) million | $(7.1) million | $(1.1) million |
| Net income (loss) | $(4.3) million | $1.8 million | $(8.3) million | $1.2 million |
| Basic loss/income per share | $(0.26) | $0.14 | $(0.49) | $0.09 |
| Cash used in operating activities | Not separately provided | Not separately provided | $(5.3) million | $(2.8) million |
Six-month 2021 comparative results were adjusted for the Company’s change in inventory accounting effective July 1, 2021.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $5.9 million at June 30, 2022, down from $10.6 million at December 31, 2021.
- Working capital was approximately $17.4 million at June 30, 2022, compared with $25.2 million at December 31, 2021.
- Inventory increased to $22.5 million from $17.0 million, primarily because of purchases made to address component shortages, extended lead times and planned product introductions.
- The revolving credit facility had $3.96 million outstanding and $1.04 million of net availability at June 30, 2022. The facility matures January 31, 2023, bears interest at SOFR plus 2.0%, and was subject to a $20 million tangible-net-worth covenant. The Company reported compliance with all covenants.
- Notes payable totaled $740,000, comprising $272,000 current and $468,000 long-term debt. Lease liabilities totaled approximately $2.5 million.
- Management stated that cash, anticipated operating cash flow and borrowing availability were expected to meet working-capital requirements for the foreseeable future, while noting that access to additional capital could be constrained by market conditions.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 6.8% year over year and 83.9% from the immediately preceding quarter, but six-month sales declined 6.0% year over year.
- Gross margin declined sharply because of higher material and freight costs, component shortages and lower production volumes that reduced manufacturing-overhead absorption.
- SG&A increased 18.7% in the second quarter and 21.1% for the six-month period, driven primarily by corporate and headquarters staffing, strategic initiatives and product-development activities.
- The Company moved from net income to net loss in both comparable periods. Results also reflected a $602,000 unrealized investment loss in the second quarter and a $1.1 million loss for six months, versus gains of $2.3 million and $2.5 million, respectively, in 2021.
- Operating cash use increased to $5.3 million from $2.8 million, primarily because of the net loss and higher inventory. Increased accounts payable and collections of receivables partially offset the cash usage.
- The Company paid approximately $1.0 million of dividends during the first six months, compared with approximately $501,000 in the prior-year period. No shares were repurchased under the authorized $5 million repurchase program during the second quarter.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance was provided.
- Management reported strong customer demand and record second-quarter bookings, but supply-chain constraints prevented conversion of all orders into shipments. Orders remained in backlog, and the Company expected to fulfill many of them in subsequent quarters, although the precise impact on 2022 sales and shipments could not be quantified.
- Semiconductor and integrated-circuit shortages, higher input and freight costs, inflation, geopolitical conflict, sanctions and COVID-19-related disruptions may continue for several quarters or years and could adversely affect sales, margins, manufacturing and cash flow.
- U.S. government agencies represented 43.9% of second-quarter sales and 37.3% of six-month sales, creating customer-concentration and government-budget risks.
- Purchase commitments for inventory were approximately $9.4 million at June 30, 2022.
- The Company recognized a $2.7 million valuation allowance against deferred tax assets, compared with $610,000 at December 31, 2021, because management concluded that sufficient future taxable income was not currently expected to utilize the entire benefit. Net deferred tax assets totaled approximately $4.1 million.
- The Company held approximately $697,000 of FG Financial Group securities at June 30, 2022, down from $1.8 million at year-end, and recorded unrealized losses during 2022.
- There were no pending material legal claims reported. Disclosure controls and procedures were deemed effective, with no material changes to internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether supply-chain constraints ease sufficiently to convert backlog into shipments and revenue.
- Whether gross margins recover from the 14.2% second-quarter level as component, freight and manufacturing costs normalize.
- Liquidity relative to the $3.96 million credit-facility balance, $1.04 million availability and January 31, 2023 maturity.
- The sustainability of dividends while the Company is generating operating losses and consuming cash.
- The concentration of sales among U.S. government customers and the effect of government budgets and appropriations.
- The realizability of deferred tax assets and the potential for additional valuation allowances.
- The effect of fluctuations in the FG Financial Group investment on reported earnings and equity.