BK Technologies Corporation — Q2 2019 Form 10-Q Summary
Business context and reporting period
BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands. Its principal markets include government, public safety, business and industrial customers. This unaudited Form 10-Q covers the three and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018 and operating comparisons are with the corresponding 2018 periods. Amounts are in thousands unless otherwise stated.
On March 28, 2019, BK Technologies Corporation became the holding-company parent of BK Technologies, Inc. Management stated that the reorganization had no material operational or financial impact, but the new parent depends on subsidiary cash flows to meet its obligations.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $13,294 | $13,656 | $20,938 | $25,402 |
| Gross margin | 42.9% | 43.1% | 38.9% | 42.2% |
| Operating income (loss) | $20 | $1,331 | $(2,298) | $2,077 |
| Net income (loss) | $(247) | $947 | $(1,565) | $503 |
| Diluted EPS | $(0.02) | $0.07 | $(0.12) | $0.04 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1,333) | $711 |
- Expenses and margins: Q2 cost of products was $7,593 and SG&A was $5,681, or 42.7% of sales, compared with 33.3% in Q2 2018. Six-month SG&A was $10,436, or 49.8% of sales, compared with 34.0%.
- Engineering investment: Engineering and product development expense was approximately $3,100 in Q2 and $5,200 for the six months, up from $1,900 and $3,700, respectively. The company began two initiatives for a successor to its KNG radio line and continued development of the BKR 9000 multiband product.
- Cash and liquidity: Cash and equivalents were $7,415 at June 30, 2019, down from $11,268 at year-end. Working capital was approximately $17,100, down from $21,000 at December 31, 2018.
- Debt: There were no borrowings under the Silicon Valley Bank revolving facility. The facility provided $1,000 of availability, bore interest at prime plus 25 basis points, and matured December 26, 2019. The company reported compliance with all covenants.
- Balance sheet: Total assets were $40,383 and stockholders’ equity was $25,232 at June 30, 2019. Inventories increased to $13,257 from $11,466 at year-end, while net trade receivables declined to $5,093 from $5,721.
- Lease obligations: Adoption of the lease standard resulted in a $2,652 right-of-use asset and corresponding lease liability. Total lease payments through the remaining lease term were $3,349, before $697 of imputed interest.
Cash flow and capital allocation
- Six-month operating cash usage of $1,333 reflected the net loss, a $1,840 increase in inventories and a $691 decrease in accrued compensation, partly offset by higher accounts payable and collections of receivables.
- Investing cash usage was $1,462, primarily for $1,462 of property, plant and equipment purchases. The prior-year period included $8,335 of proceeds from securities sales.
- Financing cash usage was $1,058, including $510 of dividends and $550 of common-stock repurchases.
- The company declared a quarterly dividend of $0.02 per share and repurchased 51,131 shares during the second quarter at an average price of $4.07 per share.
Material changes versus the prior comparable period
- Q2 sales declined 2.7%, while six-month sales declined 17.6%, primarily because of weak first-quarter sales.
- Q2 gross margin was broadly stable, but six-month gross margin fell 330 basis points because of lower first-quarter sales and manufacturing volumes, higher material costs and unfavorable product mix.
- Q2 operating income fell from $1,331 to $20, and the six-month period moved from $2,077 of operating income to a $2,298 operating loss.
- Q2 and six-month results moved from net income to net loss. The six-month comparison also benefited from a $444 unrealized investment gain in 2019 versus a $1,201 loss on investments in the 2018 statement of operations, including an approximately $849 loss on securities sales.
- SG&A increased substantially, driven primarily by engineering and product development, the holding-company structure and information-technology security and capability investments.
- Cash declined by $3,853 during the first six months, compared with a $3,576 increase in the prior-year period.
Outlook, commentary, risks and unusual items
- Management stated that federal-government orders improved after the government shutdown and that state public-safety sales also improved. Q2 sales increased 73.9% from Q1.
- Management cited an encouraging sales-prospect funnel, including potential federal, state and local public-safety customers, and expanded sales and marketing resources. The filing does not provide formal revenue or earnings guidance.
- A California State customer order of approximately $1,600 was fulfilled in Q2. A $3,100 U.S. Forest Service order was expected to be fulfilled in Q3 2019.
- Management expects higher sales, new products and greater production volumes to support future gross-margin improvement, but noted risks from product costs, competitive pricing, suppliers and contract manufacturing.
- The company held an investment in 1347 Property Insurance Holdings with a June 30 fair value of $2,363 and recognized a $148 unrealized loss in Q2 and a $444 unrealized gain for the six months.
- Net deferred tax assets were approximately $3,659. Management concluded they were realizable, but warned that additional valuation allowances could be required if future losses occur.
- Purchase commitments to suppliers totaled approximately $12,131. The company reported no pending material legal claims as of June 30.
- Key risks include reliance on U.S. government customers, government budgets and shutdowns, competition, technology and product-development execution, suppliers and contract manufacturers, inventory levels, tax-asset utilization, cybersecurity, financing access and dependence of the holding company on subsidiary distributions.
Investor verification checklist
- Verify whether the Q2 improvement in sales and gross margin continued after June 30, particularly following the federal-government shutdown.
- Track the conversion of the sales pipeline and fulfillment of the $3,100 U.S. Forest Service order.
- Assess whether elevated engineering and product-development spending produces successful successor KNG and BKR 9000 products.
- Monitor inventory growth, operating cash burn and working-capital requirements.
- Confirm renewal, replacement or amendment of the $1,000 credit facility as its December 26, 2019 maturity approached.
- Reassess the realizability of the $3,659 deferred tax asset if operating losses continue.
- Evaluate volatility and related-party governance considerations associated with the PIH investment and overlapping relationships with Fundamental Global affiliates.