BK Technologies, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are not separately provided in the supplied text.
Business Context
BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components. Its products use analog and Project 25 (P-25) digital technologies and primarily serve government, public safety and military customers. Government and public safety sales represented approximately 95% of 2018 revenue, while U.S. Government sales represented approximately 40%.
The Company operates as one reportable segment and sells products under the BK Technologies, BK Radio and RELM brands. It relies substantially on contract manufacturers and a concentrated supplier base.
Financial Highlights
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $49.4 million | $39.4 million | +25.3% |
| Gross profit margin | 40.5% | 24.2% | +16.3 percentage points |
| SG&A expense | $17.6 million | $14.6 million | +20.4% |
| Operating income (loss) | $2.4 million | $(5.0) million | Improved by $7.4 million |
| Other income (expense), net | $(2.9) million | $0.2 million | Declined by $3.1 million |
| Loss before income taxes | $(0.5) million | $(4.8) million | Improved by $4.3 million |
| Income tax benefit | $0.3 million | $1.8 million | Lower benefit |
| Net loss | $(0.2) million | $(3.6) million | Improved by $3.4 million |
| Basic and diluted loss per share | $(0.01) | $(0.27) | Improved |
| Cash flow from operations | $5.3 million | $(2.3) million | Improved by $7.6 million |
Gross-margin improvement reflected higher sales volume, a more favorable product mix, better absorption of manufacturing overhead and operational improvement programs. The 2017 comparison was depressed by a $3.2 million inventory write-off and approximately $1.8 million of product-related service costs.
Engineering and product-development expense increased to approximately $7.8 million from $5.0 million, primarily for new multiband P-25 products.
Liquidity, Capital Resources and Debt
- Cash and cash equivalents were $11.3 million at December 31, 2018, compared with $7.1 million at December 31, 2017.
- Working capital was approximately $21.0 million, compared with $26.7 million at the prior year-end. Cash, cash equivalents and trade receivables totaled approximately $17.0 million.
- Net cash provided by operating activities was $5.3 million, supported principally by a $2.9 million reduction in inventory and higher deferred revenue.
- Investing activities provided $3.2 million, including $8.3 million of proceeds from securities sales, partially offset by a $3.7 million investment in securities and $1.4 million of capital expenditures.
- Financing activities used $4.4 million, including $1.1 million of dividends and $3.3 million of share repurchases.
- The $1.0 million revolving credit facility matured on December 26, 2018, was not renewed and had no outstanding borrowings at maturity. Management stated that existing cash and expected operating cash flow should meet foreseeable working-capital needs.
Material Changes Versus 2017
- Sales increased 25.3%, with growth across federal, state and local public safety markets and from traditional Canadian customers.
- Gross margin increased substantially from 24.2% to 40.5%, reversing the effect of significant 2017 inventory and product-service charges.
- The Company moved from a $5.0 million operating loss to $2.4 million of operating income, although it remained slightly unprofitable after investment-related losses.
- Other expense included approximately $1.8 million of unrealized losses on PIH shares, an approximately $0.8 million loss on the sale of Iteris shares and approximately $0.3 million of additional commissions related to the 2017 TSG settlement.
- Inventory declined to $11.5 million from $14.4 million, while prepaid expenses and other current assets increased to $2.4 million from $0.8 million, partly due to prepayments for the new multiband product line.
- The Company repurchased 873,014 shares for approximately $3.3 million and paid quarterly dividends of $0.02 per share.
- The Company changed its name from RELM Wireless Corporation to BK Technologies, Inc. and began trading under the ticker BKTI in June 2018.
Guidance, Outlook, Risks and Unusual Items
Management did not provide numerical revenue or earnings guidance. It expected to introduce the first model in a new multiband P-25 product line during 2019, subject to FCC approval. Management described its 2019 sales pipeline as encouraging, including the U.S. Army SURAC contract and the TSA option year, but emphasized that government order timing, quantities and budgets are uncertain.
- The Company received approximately $0.8 million of initial U.S. Army SURAC task orders. The five-year contract has a maximum total value of $495 million, but does not guarantee BK Technologies any additional orders.
- The TSA exercised a one-year option through September 27, 2019, providing for up to $2.0 million of products, with no guaranteed delivery schedule or quantity.
- Backlog declined to approximately $7.6 million from $8.3 million, primarily due to order timing and fulfillment.
- Approximately 64.7% of 2018 material, subassembly and product procurements were sourced from three suppliers; approximately 66.8% were sourced internationally. Supply interruptions, tariffs, trade restrictions and foreign operational risks could affect production and margins.
- The business is highly dependent on LMR products, government and public-safety spending, and a limited number of customers and suppliers. Motorola Solutions is the dominant competitor.
- Investment-related losses reduced otherwise positive operating results. The Company held 477,282 PIH shares with a December 31, 2018 fair value of approximately $1.9 million versus an acquisition cost of approximately $3.7 million.
- Net deferred tax assets were approximately $3.5 million. Their realization depends on generating sufficient future taxable income; future losses could require a valuation allowance and additional non-cash tax expense.
- The Company had approximately $11.9 million of inventory purchase commitments at year-end and approximately $2.3 million of future minimum lease payments.
- The filing identifies risks from government shutdowns or budget reductions, product obsolescence, cybersecurity incidents, regulatory compliance, inventory valuation, fixed-price contracts and the loss of key personnel.
The TSG legal dispute was settled and the Company stated that its obligations were fulfilled by December 31, 2018. No other pending material claims were reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Important Facts for Investors to Verify
- Whether the 2018 gross-margin improvement is sustainable after the favorable product mix and absence of the major 2017 charges.
- Actual 2019 orders and revenue realized under the SURAC and TSA contract vehicles, given the absence of guaranteed quantities.
- Progress, FCC approval and customer acceptance of the multiband P-25 product line.
- Ongoing cash generation after dividends, share repurchases, capital expenditures and investments outside the core business.
- Exposure to concentrated suppliers, international sourcing, tariffs and potential component shortages.
- Future valuation of the PIH investment and the effect of investment gains or losses on net earnings.
- Utilization of the $3.5 million deferred tax asset and any future valuation allowance.
- The effect of recognizing operating lease right-of-use assets and liabilities beginning in 2019 under the new lease standard.
- Concentration of ownership: Fundamental Global and affiliates held approximately 38% of the outstanding shares and may significantly influence corporate matters.