BK Technologies Corporation — Q3 2021 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 components, primarily for government and public-safety customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. Dollar amounts are generally in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 |
|---|---|---|---|---|
| Net sales | $12.626 million | $12.760 million | $32.526 million | $33.586 million |
| Gross margin | 32.8% | 41.6% | 35.7% | 39.5% |
| Operating income (loss) | $(370) thousand | $1.154 million | $(1.422) million | $5 thousand |
| Net income (loss) | $(2.566) million | $790 thousand | $(1.398) million | $(970) thousand |
| Basic and diluted EPS | $(0.15) | $0.06 | $(0.10) | $(0.08) |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $(3.619) million | $3.525 million |
- Q3 cost of products was $8.488 million, or 67.2% of sales, versus $7.448 million, or 58.4%, in the prior-year quarter.
- Q3 SG&A increased to $4.508 million from $4.158 million; nine-month SG&A declined 1.7% to $13.034 million.
- Q3 included a $2.157 million unrealized loss on the company’s investment in FG Financial Group. The nine-month period included a $310 thousand unrealized gain.
- Cash and cash equivalents were $14.087 million at September 30, 2021, versus $6.826 million at December 31, 2020. Working capital was approximately $25.6 million.
- Inventory increased to $15.981 million from $10.545 million at year-end 2020, primarily due to supply-chain lead times and planned new product introductions. Accounts receivable was $7.646 million.
- Debt consisted of $1.470 million outstanding on the revolving credit facility and $937 thousand of equipment notes, for approximately $2.407 million of principal debt. Lease liabilities totaled $2.822 million.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat in Q3 and declined 3.2% for the first nine months, despite strong customer demand, because supply-chain constraints limited shipments.
- Gross margin declined 880 basis points in Q3 and 380 basis points for the nine-month period, reflecting higher material and freight costs, less favorable product mix and earlier inventory reserves related to the legacy KNG product line.
- The company moved from Q3 operating income of $1.154 million to an operating loss of $370 thousand. The nine-month operating result moved from approximately break-even income to a $1.422 million loss.
- Net loss worsened materially in Q3, principally because of the $2.157 million unrealized investment loss and weaker operating performance.
- Operating cash flow shifted from $3.525 million provided in the first nine months of 2020 to $3.619 million used in 2021, driven mainly by inventory and receivables growth.
- June 2021 common-stock issuance generated $11.559 million of net proceeds and increased outstanding shares to 16.814 million at September 30, 2021, from 12.512 million at December 31, 2020.
- Effective July 1, 2021, the company changed its inventory accounting to apply material burden upon receipt rather than when issued to work in process. Prior periods were retrospectively adjusted; management stated the change did not materially affect 2021 operating loss, net loss or EPS.
Guidance, Outlook, Risks and Unusual Items
- Management reported strong Q3 orders and backlog but stated that supply-chain constraints prevented conversion of all demand into shipments. The company expects to fulfill many delayed orders in Q4 2021, without providing quantified revenue or earnings guidance.
- Semiconductor and integrated-circuit shortages have caused extended lead times, higher costs and increased inventory. Management stated shortages could continue for several quarters or years.
- The BKR 5000, the first product in the new BKR Series, was generating increasing sales. Additional product timing remains uncertain and could be affected by supply constraints and COVID-19.
- U.S. government agencies represented 50.5% of Q3 sales and 39.4% of nine-month sales. Government budget cycles, appropriations and wildland-fire activity may cause significant quarterly variability.
- The company had approximately $13.142 million of inventory purchase commitments at September 30, 2021.
- The revolving credit facility matures January 31, 2022, has $3.530 million of reported availability, and requires maintenance of at least $20 million of tangible net worth. The company was in compliance with its covenants.
- Management believes cash, expected operating cash flow and available borrowing capacity will meet foreseeable working-capital needs, but acknowledges potential limitations on future capital raising and credit access.
- Net deferred tax assets were approximately $4.116 million, with a $98 thousand valuation allowance. Additional allowance may be required if future losses continue.
- No material legal claims were pending as of September 30, 2021. Management identified COVID-19, supply-chain disruption, customer concentration, fixed-price contracts, competition, technology execution and liquidity or capital-raising risks.
Most Important Facts for Investors to Verify
- Whether delayed Q3 orders convert into Q4 shipments and revenue, and whether supply constraints persist.
- Whether gross margins recover from the 32.8% Q3 level despite material, freight and product-mix pressures.
- The January 31, 2022 maturity, renewal prospects and borrowing-base availability of the revolving credit facility.
- Inventory aging, excess or obsolete reserves, and the cash required to fund approximately $13.142 million of purchase commitments.
- The valuation and volatility of the FG Financial Group investment, including the effect of further unrealized gains or losses on reported earnings.
- The sustainability of the quarterly $0.02-per-share dividend given negative operating cash flow and the subsidiary-level debt covenants.
- Whether the BKR Series achieves expected market expansion and offsets dependence on U.S. government and public-safety spending.