BK Technologies Corp. (identified in filing as RELM Wireless Corporation) — Q1 2017 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2017, and was signed May 9, 2017. 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 customers. The filing identifies the registrant as RELM Wireless Corporation.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $7.380 million | $12.069 million |
| Gross profit / margin | $2.237 million / 30.3% | $3.829 million / 31.7% |
| SG&A | $3.443 million / 46.7% of sales | $3.063 million / 25.4% |
| Operating income (loss) | $(1.206) million | $0.766 million |
| Income (loss) before taxes | $(1.389) million | $0.768 million |
| Net income (loss) | $(1.268) million | $0.513 million |
| Basic and diluted EPS | $(0.09) | $0.04 |
| Operating cash flow | $(1.117) million | $2.612 million |
- P-25 digital product sales were $5.5 million, or 74.3% of sales, versus $7.9 million, or 65.5%, in the prior-year quarter.
- Cash and cash equivalents were $8.325 million at March 31, 2017, down from $10.910 million at December 31, 2016.
- Working capital was approximately $20.8 million, versus $23.4 million at year-end 2016.
- Total assets were $42.354 million and total liabilities were $6.943 million at quarter-end.
- Inventory increased to $14.751 million from $13.999 million at December 31, 2016.
- The company had no borrowings under its secured revolving credit facility, with $1.0 million available and a stated maturity of December 27, 2017.
- Investing cash outflow was $319,000, primarily for engineering equipment. Financing cash outflow was $1.149 million, including approximately $1.235 million of dividends and $97,000 of share repurchases.
Material changes versus the prior comparable period
- Sales declined 38.9%, primarily because the prior-year quarter included deliveries under a U.S. Transportation Security Administration contract that were completed during 2016.
- Gross margin decreased 140 basis points to 30.3%, reflecting unfavorable product mix, lower production volumes, reduced manufacturing overhead absorption, and approximately $0.3 million of product enhancement and discontinued-development costs.
- SG&A increased 12.4% in dollars and substantially increased as a percentage of sales. General and administrative expense included approximately $0.4 million of non-recurring senior-management change costs; engineering expense included approximately $26,000 related to a specific product matter.
- Other expense included a $104,000 loss on disposal of assets related to a discontinued product initiative and an approximately $74,000 foreign-exchange loss on a Canadian-dollar-denominated contract.
- Operating cash flow changed from $2.612 million provided in Q1 2016 to $1.117 million used in Q1 2017, driven principally by the net loss, inventory purchases, payment of accrued compensation, and the absence of prior-year customer deposits.
- The company implemented significant senior-management and board changes. Timothy Vitou became President, replacing David Storey, and the board was reconfigured.
Outlook, commentary, risks, contingencies, and unusual items
- Management reported a sluggish start to the quarter but said demand from federal, state, local, and international customers rebounded in March. It described quote and proposal activity as active and the sales-prospect funnel as healthy.
- The company expanded its sales resources and intends to continue doing so. Management believes higher sales volumes and manufacturing efficiencies could improve gross margins, although product-cost and competitive-pricing pressures remain risks.
- Management stated that cash, anticipated operating cash generation, and available revolver capacity should meet working-capital needs for the foreseeable future, while cautioning that economic conditions could restrict access to credit or capital.
- Government customers remained material: U.S. government agencies represented 39.5% of Q1 sales and a Canadian governmental agency represented 17.9%. The filing identifies reliance on government spending, contract manufacturers, suppliers, technology, competition, key personnel, inventory, and debt levels as risks.
- The company held approximately 1.8 million Iteris shares, representing about 5.5% of Iteris outstanding shares. The investment had a $3.201 million after-tax unrealized gain recorded in other comprehensive income, not earnings, and contributed to a $2.059 million quarterly unrealized gain in accumulated other comprehensive income.
- Deferred tax assets were $2.398 million. Management concluded that approximately $129,000 was more likely than not unrealizable because of insufficient Florida taxable income and noted that additional valuation allowances may be required if future losses continue.
- A former sales representative claimed approximately $6.090 million for alleged unpaid past and future commissions. The company believes the claim lacks merit and recorded no provision; the outcome cannot presently be determined.
- Purchase commitments to suppliers for inventory were approximately $5.249 million at March 31, 2017.
- The company declared a quarterly dividend of $0.09 per share and repurchased 19,300 shares during the quarter at an average price of $5.11 per share; 450,278 shares remained available under the repurchase authorization.
Important facts for investors to verify
- Confirm the registrant and corporate-name relationship between the requested BK Technologies Corp. entity and the filing’s stated registrant, RELM Wireless Corporation.
- Assess whether the sharp sales decline caused by the completed TSA contract is temporary and whether the reported sales pipeline converts into orders.
- Monitor gross-margin recovery, manufacturing utilization, inventory levels, and the $5.249 million of supplier purchase commitments.
- Evaluate cash burn relative to the $8.325 million cash balance, the $1.0 million revolver availability, dividend policy, and share repurchases.
- Track the $6.090 million sales-representative litigation and any subsequent accrual or settlement.
- Review the valuation and liquidity implications of the Iteris investment, including its concentration and market-value volatility.
- Verify the realizability of deferred tax assets and the effect of future operating losses on valuation allowances.
- Review the full Form 10-K risk factors and subsequent filings for developments in government demand, leadership changes, financing, and contingencies.