BK Technologies Corp. (formerly RELM Wireless Corporation) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 13, 2014. The filing identifies the registrant as RELM Wireless Corporation, not BK Technologies Corp. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $7.824 million | $7.073 million | +10.6% |
| Gross profit | $3.146 million | $3.235 million | Down |
| Gross margin | 40.2% | 45.7% | Down 5.5 points |
| Operating income | $600,000 | $499,000 | +20.2% |
| Income before taxes | $601,000 | $479,000 | +25.7% |
| Net income | $475,000 | $405,000 | +17.3% |
| Diluted EPS | $0.03 | $0.03 | No change reported |
| Net cash from operations | $136,000 | $(1.865) million | Improved |
- P25 digital product sales increased 19.4% to approximately $5.7 million, representing 73.0% of sales versus 67.6% in the prior-year quarter.
- SG&A declined 6.9% to $2.546 million, or 32.5% of sales, from $2.736 million, or 38.7% of sales.
- Cash and cash equivalents were $8.042 million at March 31, 2014, compared with $7.945 million at December 31, 2013.
- Working capital was approximately $26.3 million, compared with $25.7 million at December 31, 2013.
- Trade receivables rose to $5.539 million from $2.844 million at year-end, while inventory declined to $10.865 million from $11.575 million.
- Total liabilities were $3.436 million and stockholders’ equity was $32.005 million at March 31, 2014.
- There were no borrowings under the secured revolving credit facility. Approximately $4.346 million was available under the $5 million facility, subject to the borrowing base, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Sales growth was driven primarily by orders from legacy and new state, county and municipal public-safety customers for P25 products, including newer KNG models and legacy D-series products.
- Gross margin contracted because of competitive pricing pressure, a less favorable product mix, and lower manufacturing volumes that reduced absorption of manufacturing and support costs.
- Operating income nevertheless increased because higher sales and lower SG&A more than offset the gross-margin decline.
- Operating cash flow improved from a $1.865 million use to $136,000 of cash generation, aided by a $710,000 inventory reduction and higher accounts payable, partially offset by a $2.695 million increase in receivables.
- Capital expenditures and other investing uses totaled $137,000, compared with $200,000 in the prior-year quarter. No software costs were capitalized during Q1 2014.
- Common shares outstanding increased to 13,636,022 from 13,588,804 at December 31, 2013, primarily from option exercises that generated $98,000.
Outlook, risks, contingencies and unusual items
- Management expects higher sales volumes and P25 product sales, together with manufacturing improvements, to support future gross-margin improvement; no quantitative earnings or revenue guidance was provided.
- Management believes cash, expected operating cash flow and available revolver capacity are sufficient for foreseeable working-capital needs, but cautions that economic conditions could restrict access to credit or capital.
- The company relies significantly on U.S. government customers: such sales were $3.183 million, or 39.9% of Q1 sales, versus 46.5% in Q1 2013.
- Key risks include technology changes, competition, government budget constraints, reliance on contract manufacturers and suppliers, government-customer concentration, inventory and debt levels, deferred-tax-asset utilization, personnel retention, regulation, overseas manufacturing, intellectual-property claims and maintenance of the NYSE MKT listing.
- Net deferred tax assets were approximately $6.782 million, primarily related to federal and state net operating loss carryforwards. Management concluded the assets were more likely than not realizable, but future losses could require a valuation allowance.
- Inventory reserves declined to approximately $1.694 million from $2.960 million at December 31, 2013. Previously fully reserved obsolete inventory was disposed of without a material financial-statement impact.
- No material legal claims were pending at March 31, 2014. Purchase orders to suppliers totaled approximately $4.720 million.
- The exhibits include a March 25, 2014 settlement agreement with Privet Fund LP, Privet Fund Management LLC and affiliates; the supplied filing text does not provide the settlement terms or financial impact.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification points
- Confirm the registrant’s corporate identity and any subsequent name change from RELM Wireless Corporation to BK Technologies Corp.
- Assess whether the 5.5-point gross-margin decline was temporary or reflects sustained pricing, product-mix or manufacturing-absorption pressure.
- Review the composition and collectability of the $5.539 million receivable balance, particularly government-agency receivables of approximately $2.346 million.
- Evaluate the sustainability of P25-driven sales growth and the company’s concentration in U.S. government customers.
- Verify the terms and financial consequences of the Privet Fund settlement agreement.
- Monitor realization of the $6.782 million deferred tax asset and expiration of related NOLs beginning in 2018.
- Confirm renewal or replacement of the revolving credit facility, which was scheduled to mature on December 31, 2014.