Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and nine months ended September 30, 2014, filed November 12, 2014. The registrant is identified in the filing as RELM Wireless Corporation; the request metadata identifies BK Technologies Corp. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components under the BK Radio and RELM brands, serving government, public safety, business and industrial markets.
All financial statement amounts are in thousands, except per-share and share data, and the financial statements are unaudited.
Financial Highlights
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $8.670 million | $7.600 million | $25.552 million | $20.864 million |
| Gross margin | 43.7% | 43.1% | 42.3% | 44.2% |
| Operating income | $1.033 million | $0.767 million | $2.672 million | $1.644 million |
| Net income | $0.656 million | $0.514 million | $1.802 million | $1.116 million |
| Diluted EPS | $0.05 | $0.04 | $0.13 | $0.08 |
- Q3 sales increased 14.1%; nine-month sales increased 22.5%.
- P25 digital product sales increased 14.7% in Q3 to approximately $6.3 million and 33.8% for nine months to approximately $18.6 million. P25 products represented 72.1% and 72.6% of sales, respectively.
- Q3 operating margin was approximately 11.9%, compared with 10.1% in the prior-year quarter. Nine-month operating margin was approximately 10.5%, compared with 7.9%.
- SG&A was $2.756 million in Q3 and $8.141 million for nine months, representing approximately 31.8% and 31.9% of sales, versus 33.0% and 36.3% in the comparable periods.
- Income tax expense was $0.380 million in Q3 and $0.864 million for nine months and was described as largely non-cash because of deferred tax assets and net operating loss carryforwards.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $3.300 million for the nine months ended September 30, 2014, compared with $1.563 million in the prior-year period.
- Investing cash outflow was $0.483 million, primarily for manufacturing and engineering test equipment and an enterprise-system upgrade. Financing cash inflow was $0.144 million from common-stock option exercises.
- Cash and cash equivalents increased to $10.906 million from $7.945 million at December 31, 2013.
- Working capital was approximately $28.2 million at September 30, 2014, compared with $25.7 million at December 31, 2013. Cash and trade receivables totaled approximately $15.5 million.
- The company had no borrowings under its secured $5.0 million revolving credit facility at September 30, 2014 and reported approximately $4.385 million of availability, subject to the borrowing base. The facility matured December 31, 2014. The company was in compliance with its covenants.
- Total liabilities were $4.237 million and stockholders’ equity was $33.402 million at September 30, 2014. Recorded note payable balances totaled $23 thousand.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based across new federal, state, local and international customers, as well as legacy customers, with increased contributions from KNG P25 digital products and wildland-fire-related D-series radios.
- Q3 gross margin improved modestly year over year and sequentially from 42.8% in Q2 2014; however, nine-month gross margin declined to 42.3% from 44.2%, reflecting product mix, competitive pricing pressure and lower manufacturing-volume absorption earlier in the year.
- Management attributed improved profitability primarily to higher sales, increased gross-profit contribution and better SG&A leverage.
- Accounts receivable increased $1.741 million during the first nine months, reflecting sales late in the quarter that had not completed their collection cycle. Accounts payable increased $0.898 million in anticipation of higher volumes and material purchases.
- Inventory was $11.684 million, broadly stable with $11.575 million at year-end, while inventory reserves declined to approximately $1.703 million from $2.960 million after disposal of previously fully reserved obsolete inventory.
- Capitalized software declined to $0.887 million from $1.478 million. No software costs were capitalized during the 2014 periods presented.
- Common shares outstanding increased to 13,665,087 from 13,588,804 at year-end, primarily from option exercises.
Outlook, Commentary, Risks and Unusual Items
- No specific numerical revenue or earnings guidance was provided. Management stated that higher sales volumes, greater P25 product penetration and manufacturing improvements should support gross-margin improvement.
- Management expected future capital expenditures to be funded through existing cash and operating cash flow and believed cash, expected operating cash generation and credit availability were sufficient for foreseeable working-capital needs.
- Key risks include dependence on U.S. government agency sales, government budget constraints, competition and technology changes in land mobile radio, reliance on contract manufacturers and suppliers, inventory and debt levels, ability to utilize deferred tax assets, access to capital, customer and product concentration, and volatility in operating results.
- U.S. government agencies represented 44.2% of Q3 sales and 40.3% of nine-month sales, compared with 38.8% and 36.3% in the prior-year periods. Government-agency receivables were $2.002 million at September 30, 2014.
- Deferred tax assets were approximately $6.027 million, supported primarily by federal NOLs of $4.865 million and state NOLs of $13.771 million. Management concluded the assets were more likely than not realizable, but future losses could require a valuation allowance.
- Purchase orders to suppliers totaled approximately $3.845 million. The filing reported no pending material legal claims as of September 30, 2014.
- Disclosure controls and procedures were deemed effective, and no material changes to internal control over financial reporting were identified during the quarter.
Investor Verification Priorities
- Verify the registrant’s corporate identity and any relationship between RELM Wireless Corporation in the filing and BK Technologies Corp. in the request metadata.
- Verify the status, renewal or replacement of the revolving credit facility, including borrowing-base availability and covenant compliance after its December 31, 2014 maturity.
- Assess sustainability of the revenue increase and the elevated concentration in U.S. government customers and P25 digital products.
- Monitor gross-margin recovery, particularly the effect of product mix, pricing pressure and manufacturing-volume absorption.
- Evaluate collectability of increased government-related receivables and the company’s $3.845 million of supplier purchase commitments.
- Assess the realizability of the $6.027 million deferred tax asset and the potential for future valuation allowances if earnings weaken.