BK Technologies Corp. (Registrant: RELM Wireless Corporation) — Q1 2013 Form 10-Q Summary
Business context and reporting period
The filing is an unaudited Form 10-Q for the three months ended March 31, 2013, filed May 8, 2013. The filing identifies the registrant as RELM Wireless Corporation; the provided metadata identifies BK Technologies Corp. The company sells land mobile radio products, including P25 digital products and KNG radios.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / Prior period |
|---|---|---|
| Net sales | $7.073 million | $4.369 million |
| Gross profit | $3.235 million | $1.667 million |
| Gross margin | 45.7% | 38.2% |
| Operating income (loss) | $499,000 | $(673,000) |
| Operating margin | 7.1% | (15.4)% |
| Income (loss) before taxes | $479,000 | $(678,000) |
| Net income (loss) | $405,000 | $(401,000) |
| Basic and diluted earnings (loss) per share | $0.03 | $(0.03) |
| Cash flow from operating activities | $(1.865) million | $777,000 |
| Capital expenditures and capitalized software | $200,000 | $19,000 |
P25 digital products generated approximately $4.8 million, or 67.6% of sales, compared with $2.2 million, or 49.8%, in the prior-year quarter. SG&A was $2.736 million, or 38.7% of sales, compared with $2.340 million, or 53.6%.
At March 31, 2013, cash and cash equivalents were $4.516 million, trade receivables were $4.996 million, inventories were $13.480 million, and working capital was approximately $24.2 million. Total assets were $34.475 million and stockholders’ equity was $30.620 million.
The company had no borrowings outstanding under its secured revolving credit facility. The facility had maximum availability of $5.0 million, subject to a borrowing base, with approximately $4.203 million available at March 31, 2013. The facility matures December 31, 2014, and the company reported compliance with its covenants. The facility bears interest at a variable rate; the rate was 4.00% at March 31, 2013.
Material changes versus the prior comparable period
- Sales increased 61.9%, primarily from substantial orders by longstanding customers and additional orders from new state and local public-safety customers.
- Gross margin expanded 750 basis points, reflecting favorable P25 product mix and higher manufacturing volumes, which improved absorption of fixed manufacturing and support costs.
- The company moved from a $673,000 operating loss to $499,000 of operating income and from a $401,000 net loss to $405,000 of net income.
- SG&A increased by approximately $396,000, including higher engineering, product development, marketing, selling, headquarters, and compensation-related costs, but declined substantially as a percentage of sales.
- Operating cash flow declined to a use of $1.865 million, primarily because accounts receivable increased by $2.934 million following sales late in the quarter. Accounts payable increased by $610,000 and partially offset the working-capital use.
- Cash decreased by $2.065 million during the quarter, from $6.581 million at December 31, 2012 to $4.516 million at March 31, 2013.
- The board authorized share repurchases of up to $2.5 million through December 31, 2013, but no shares were repurchased during the quarter.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that higher sales volumes, continued P25 product sales, and manufacturing improvements should support gross-margin improvements. Management believed available cash, anticipated operating cash flow, and borrowing capacity would be sufficient to meet working-capital requirements for the foreseeable future, while cautioning that economic conditions could limit access to credit or other capital.
- United States government agencies represented approximately $3.276 million, or 46.5%, of Q1 sales, compared with 32.4% in the prior-year quarter. Government receivables were approximately $2.891 million at March 31, 2013.
- Purchase orders to suppliers totaled approximately $3.813 million.
- Inventory reserves for slow-moving, excess, or obsolete inventory were approximately $2.845 million against reported inventory of $13.480 million.
- Net deferred tax assets were approximately $7.333 million, primarily related to net operating loss carryforwards. Federal NOLs totaled approximately $8.263 million and state NOLs approximately $17.807 million, with expirations beginning in 2017. The company maintained a $14,000 valuation allowance and stated that additional allowances could be required if future losses occur.
- No material legal claims or proceedings were pending as of March 31, 2013.
- Key disclosed risks include technology changes, success of the LMR product line, industry competition, government budget constraints, reliance on contract manufacturers and suppliers, government-customer concentration, utilization of deferred tax assets, inventory and debt levels, regulatory matters, foreign manufacturing, intellectual-property claims, operating volatility, and maintenance of the NYSE MKT listing.
- Management reported effective disclosure controls and procedures as of March 31, 2013, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the relationship between the provided company name, BK Technologies Corp., and the filing registrant name, RELM Wireless Corporation.
- Assess whether the sharp sales and margin improvement is sustainable or reflects timing and concentration of customer orders.
- Monitor collections of the $4.996 million receivable balance and the effect of government-customer concentration on operating cash flow.
- Evaluate inventory levels, the $2.845 million inventory reserve, and the $3.813 million supplier purchase-order commitment.
- Verify continued covenant compliance, borrowing-base availability, and the maturity terms of the revolving credit facility.
- Assess the realizability of the $7.333 million deferred tax asset and the potential for additional valuation allowances.
- Track whether the authorized $2.5 million share-repurchase program is implemented and how it affects liquidity.