BK Technologies Corp annual report, FY2017

Filing Scope and Business Context

This Form 10-K was filed by RELM Wireless Corporation, now associated with the BK Technologies business, for the fiscal year ended December 31, 2017. The filing identifies the registrant as RELM Wireless Corporation (NYSE American: RWC), not “BK Technologies Corp.” The company designs, manufactures and markets two-way land-mobile radios, repeaters, base stations and related equipment for government, public-safety, military, business and industrial customers. It operates as one reportable segment.

Government and public-safety sales represented approximately 97% of total sales in both 2017 and 2016.
P-25 digital products generated approximately $28.7 million, or 72.7% of 2017 sales, compared with $33.2 million, or 65.5%, in 2016.
The U.S. Government represented approximately 38% of 2017 sales, compared with 58% in 2016.

Financial Performance and Position

Metric	2017	2016	Change
Net sales	$39.4 million	$50.7 million	Down 22.3%
Gross profit margin	24.2%	33.7%	Down 9.5 percentage points
SG&A expense	$14.6 million	$12.8 million	Up 13.9%
Operating income (loss)	$(5.0) million	$4.3 million	Declined $9.3 million
Income (loss) before taxes	$(4.8) million	$4.3 million	Declined $9.1 million
Net income (loss)	$(3.6) million	$2.7 million	Declined $6.3 million
Basic and diluted EPS	$(0.27)	$0.20 basic; $0.19 diluted	Turned negative
Cash flow from operations	$(2.3) million	$10.7 million	Declined $13.0 million

2017 gross margin was adversely affected by a $3.2 million inventory write-off and approximately $1.8 million of product-related service and modification costs. SG&A increased primarily because of new product development, legal fees and senior-management changes. The company also recorded a $1.8 million gain on the sale of Iteris securities and $1.4 million of legal-settlement expense.

Cash and cash equivalents were $7.1 million at December 31, 2017, compared with $10.9 million at year-end 2016.
Available-for-sale securities totaled $9.2 million at year-end 2017; the company held approximately 1.3 million Iteris shares.
Working capital was approximately $26.7 million, compared with $23.4 million in 2016.
Total assets were $42.8 million and stockholders’ equity was $32.0 million at year-end 2017.
Net inventory was $14.4 million, compared with $14.0 million in 2016. Trade receivables increased to $5.5 million from $3.4 million.
Cash used in investing activities was not reported as a use in 2017: investing activities provided $2.0 million, including $2.6 million of securities-sale proceeds and $628,000 of capital expenditures.
Financing activities used $3.5 million, including $3.0 million of dividends and $648,000 of share repurchases.

Debt, Liquidity and Capital Return

The company had a $1.0 million revolving credit facility with Silicon Valley Bank, maturing December 26, 2018, with no borrowings outstanding at December 31, 2017.
The facility bears interest at the Wall Street Journal prime rate plus 25 basis points and is secured by substantially all company assets.
The company stated that it was in compliance with all debt covenants and believed cash, expected operating cash flow and borrowing availability were sufficient for foreseeable working-capital needs.
The board authorized a total repurchase program of up to 1.0 million shares. During 2017, 161,672 shares were repurchased for approximately $648,000; 808,106 shares remained authorized at year-end.
2017 dividends totaled approximately $3.0 million, including quarterly dividends of $0.09 per share and $0.02 per share for the remaining three declared payments.

Material Changes, Outlook and Unusual Items

Management described 2017 as a transition year involving significant board and senior-management changes, operational reviews, product-strategy changes and efforts to improve efficiency and quality.
Sales declined because significant 2016 Transportation Security Administration orders were not fully repeated. Excluding TSA sales, management estimated that 2017 sales increased approximately 20.9% from 2016.
Management reported stronger demand from other federal, state and international public-safety agencies and cited multi-year contracts and blanket purchase agreements expected to support future opportunities. These awards do not guarantee purchase quantities or delivery dates.
The company was named a supplier under a Department of the Interior contract with a maximum potential value of $3 billion through September 2022, received a U.S. Forest Service BPA with potential purchases of up to $25 million, and received a U.S. Air Force BPA with potential purchases of up to $5.5 million. The company fulfilled an initial approximately $440,000 Air Force task order in the fourth quarter of 2017.
Backlog was approximately $8.3 million at December 31, 2017, compared with $6.6 million in 2016.
The company settled a former sales representative’s lawsuit. It paid or accrued $900,000, accrued approximately $536,000 of estimated 2018 commissions, and may owe up to $2.0 million less such commissions if a change-in-control transaction occurs by December 31, 2018.
The company adopted the new financial-instruments standard on January 1, 2018 and recognized approximately $4.3 million of net unrealized gain in retained earnings. It also disclosed that sales of Iteris shares in January and February 2018 would produce approximately $8.3 million of proceeds and a loss of approximately $708,000.
The company expects adoption of the new revenue-recognition standard in the first quarter of 2018 to have no material effect. The future lease-accounting impact remained under evaluation.

Principal Risks and Contingencies

Dependence on a single LMR product line, government and public-safety customers, and a mature, highly competitive market dominated by Motorola Solutions.
Unpredictable government budgets, appropriations, contract awards, protests, audits, cancellations and potential pricing pressure.
Technology transition from analog to digital and the need to successfully develop and commercialize new P-25 and multiband products.
Concentration among suppliers and contract manufacturers: approximately 61.6% of 2017 procurement was sourced from three suppliers and approximately 65.7% was sourced internationally.
Inventory-obsolescence and demand-forecasting risk, including $12.4 million of inventory purchase commitments at year-end.
Deferred tax assets of approximately $3.3 million, federal NOLs of approximately $6.5 million and state NOLs of approximately $13.9 million, with future realization dependent on sufficient taxable income.
Approximately $9.2 million of marketable equity securities exposed to market-value fluctuations.
Potential effects from regulatory compliance, government-contracting requirements, cybersecurity events, supply disruptions, fixed-price contracts, litigation and the company’s ability to maintain its NYSE American listing.

Investor Verification Checklist

Verify the registrant identity and corporate-name history, because the filing is for RELM Wireless Corporation while the request identifies BK Technologies Corp.
Assess whether the 2017 margin deterioration and loss were primarily one-time items or indicate ongoing product-cost, pricing and execution problems.
Verify actual orders, revenue recognition and delivery timing under the DOI, USFS and USAF agreements; none guarantees purchases.
Review cash conversion, receivables, inventory levels and the $12.4 million of purchase commitments relative to the $7.1 million cash balance.
Evaluate the sustainability of dividends and repurchases given negative operating cash flow and the $1.0 million undrawn credit facility.
Monitor realization of deferred tax assets and the effect of the 2017 Tax Act and subsequent accounting changes.
Review the TSG settlement obligations, including 2018 commissions and the potential change-in-control payment.