Business context and reporting period
The filing is a Form 10-K for RELM Wireless Corporation, not BK Technologies Corp. It covers the fiscal year ended December 31, 2015; the source does not present a standalone fourth-quarter filing. RELM designed, manufactured and marketed two-way land mobile radios, repeaters, base stations and related equipment under the BK Radio and RELM brands. Approximately 90% of 2015 sales came from government and public safety customers, with the remainder from business and industrial customers.
The company’s products included analog and Project 25 (P-25) digital equipment. The company was listed on the NYSE MKT under ticker RWC and qualified as a smaller reporting company.
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $29.7 million | $31.0 million | Down 4.0% |
| P-25 digital sales | $20.2 million | $22.4 million | Down 9.8% |
| Gross profit margin | 41.3% | 42.6% | Down 1.3 percentage points |
| SG&A expense | $10.9 million | $10.7 million | Up 1.8% |
| Operating income | $1.4 million | $2.5 million | Down 43.4% |
| Net income | $1.0 million | $1.6 million | Down 35.9% |
| Basic and diluted EPS | $0.08 | $0.12 | Down $0.04 |
| Net cash from operating activities | $(2.9) million | $4.0 million | Declined $6.9 million |
Gross margin declined primarily because of a less favorable product mix, lower sales of higher-margin P-25 products, lower manufacturing volumes and reduced absorption of manufacturing overhead. SG&A increased mainly because of higher selling expenses; marketing and selling costs rose to approximately $4.2 million from $3.9 million.
At December 31, 2015, cash and cash equivalents were $4.7 million, compared with $11.4 million at year-end 2014. Working capital was approximately $23.9 million, compared with $25.1 million. Inventories increased to $16.3 million from $12.1 million, and trade receivables increased to $4.1 million from $3.3 million.
Cash used in investing activities was $3.9 million, including $2.8 million for an investment in Iteris common stock and $1.1 million for manufacturing and engineering equipment. Cash provided by financing activities was $92,000 from stock-option exercises. Total assets were $39.4 million and total liabilities were $4.6 million at year-end.
The company had no borrowings outstanding under its $2.0 million Silicon Valley Bank revolving credit facility and reported approximately $2.0 million of remaining availability. The facility was amended in December 2015, reducing availability from $5.0 million, extending maturity to December 28, 2016, and reducing the borrowing rate to the lender’s prime rate. The company stated that it was in compliance with all covenants.
Material changes versus the prior comparable period
- Sales decreased by approximately $1.3 million, driven primarily by weaker demand from federal, state and local public safety agencies, including wildland fire customers.
- P-25 digital sales fell by approximately $2.2 million and represented 68.0% of sales, compared with 72.3% in 2014.
- Gross margin fell from 42.6% to 41.3%, while SG&A rose from 34.4% to 36.5% of sales.
- Operating income declined by approximately $1.1 million and net income declined by approximately $582,000.
- Operating cash flow shifted from $4.0 million provided to $2.9 million used, principally because inventory and prepaid expenses increased by approximately $5.3 million in preparation for TSA-related orders.
- Backlog increased to approximately $20.3 million at December 31, 2015 from $4.2 million, primarily due to the Department of Homeland Security award.
- The company purchased approximately $2.8 million of Iteris stock, which was classified as an available-for-sale security. The investment generated an unrealized after-tax gain of approximately $397,000 in other comprehensive income at year-end.
Guidance, outlook, risks and unusual items
In September 2015, the company received DHS Tactical Communications Contract awards totaling approximately $26.2 million for TSA deployment at more than 400 airports. Approximately $15.5 million was specified in delivery orders. No related equipment was shipped or recognized as revenue in 2015. Management anticipated shipments would begin in the first quarter of 2016, but stated that timing by quarter was uncertain. Remaining option years totaling approximately $10.7 million were not guaranteed.
Management reported increased requests for quotes and information late in 2015, an expanded prospect pipeline and plans to add sales resources to support 2016 growth. The filing provides no quantified 2016 revenue or earnings guidance.
Key risks include dependence on government and public safety spending, particularly the U.S. Government, which represented approximately 36% of 2015 sales; intense competition from substantially larger suppliers, especially Motorola Solutions; technology transitions from analog to digital and increasing P-25 adoption; dependence on a limited number of contract manufacturers and component suppliers; and exposure to international sourcing, which represented approximately 68% of 2015 material, subassembly and product procurements.
Other material considerations include approximately $12.2 million of inventory purchase commitments, substantial inventory subject to obsolescence risk, a $5.5 million net deferred tax asset dependent on future taxable income, and approximately $3.1 million invested in Iteris stock as of February 25, 2016. The company had no pending material legal proceedings and no off-balance-sheet arrangements. Management and the auditor reported effective internal controls and an unqualified audit opinion; the audit did not include an opinion on internal control over financial reporting because the company was not required to have such an audit.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for RELM Wireless Corporation, while the request metadata identifies BK Technologies Corp.
- Verify the timing, delivery orders, revenue-recognition terms and remaining options associated with the $26.2 million DHS/TSA award.
- Assess whether the substantial inventory build and $12.2 million of purchase commitments convert into shipments and cash collections.
- Review liquidity after the decline in cash, including the $2.0 million credit facility, covenant requirements and its December 2016 maturity as disclosed.
- Evaluate the carrying value and volatility of the Iteris investment and its effect on cash, comprehensive income and future liquidity.
- Assess the realizability of the $5.5 million deferred tax asset and the expiration schedule for federal and state net operating losses.
- Monitor customer concentration, government budget trends, P-25 product demand, supplier concentration and contract-manufacturing dependencies.