BK Technologies Corp. (formerly RELM Wireless Corporation) — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed November 1, 2017. The filing identifies the registrant as RELM Wireless Corporation, which conducted business under the BK Technologies and RELM brands. Financial amounts are in thousands unless otherwise stated.
Business context
The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components for government, public safety, business and industrial customers. BK Radio products primarily serve government and public safety markets, while RELM products serve business and industrial markets. Products include analog and APCO Project 25 digital technology.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $11.831 million | $14.730 million | $29.973 million | $43.463 million |
| Gross margin | 32.3% | 31.4% | 35.2% | 32.3% |
| Operating income (loss) | $157 thousand | $1.082 million | $(76) thousand | $3.941 million |
| Net income | $600 thousand | $719 thousand | $650 thousand | $2.597 million |
| Diluted EPS | $0.04 | $0.05 | $0.05 | $0.19 |
- Third-quarter sales declined approximately 19.7% year over year; nine-month sales declined approximately 31.0%.
- Third-quarter net income declined approximately 16.6%; nine-month net income declined approximately 75.0%.
- Operating margin was approximately 1.3% in the third quarter and negative 0.3% for the nine-month period, compared with approximately 7.3% and 9.1%, respectively, in the prior-year periods.
- P-25 digital product sales were $8.2 million, or 69.7% of third-quarter sales, and $21.4 million, or 71.3% of nine-month sales.
- SG&A increased to $3.7 million in the third quarter and $10.6 million for nine months, representing 30.9% and 35.4% of sales, respectively. Nine-month SG&A included approximately $0.4 million of non-recurring first-quarter senior-management transition costs.
- Cash and cash equivalents were $8.938 million at September 30, 2017, compared with $10.910 million at December 31, 2016. Available-for-sale securities totaled $9.753 million, including $1.180 million classified as current.
- Working capital was approximately $24.5 million, including approximately $16.0 million of cash, cash equivalents and trade receivables.
- There was no debt outstanding under the secured revolving facility. The facility provided $1.0 million of remaining availability and matured December 27, 2017.
Cash flow and capital allocation
- Operating activities used $245 thousand during the first nine months of 2017, versus $8.306 million provided in the prior-year period.
- Investing activities provided $1.247 million, including $1.819 million of proceeds from sales of available-for-sale securities, partially offset by $572 thousand of capital expenditures.
- Financing activities used $2.974 million, including $2.752 million of dividends and $405 thousand of share repurchases, partly offset by $183 thousand from stock-option exercises.
- Cash declined by $1.972 million during the first nine months, ending at $8.938 million.
Material changes versus the prior comparable period
- Sales and earnings were lower primarily because 2016 included substantial U.S. Transportation Security Administration shipments that were not repeated in 2017.
- Demand from non-TSA federal, state and international public-safety agencies improved in the third quarter; non-TSA sales increased approximately 15.4% year over year.
- Gross margin improved despite lower sales, rising 90 basis points in the third quarter and 290 basis points for the nine-month period. Management attributed results to product mix, promotional pricing, incremental product costs and prior-year TSA pricing pressure.
- Receivables increased $3.584 million and inventories increased $1.257 million during the first nine months, while accounts payable increased $3.803 million, reflecting later-quarter sales and material purchases.
- The company sold 311,502 shares of Iteris common stock during the first nine months, recording approximately $1.287 million of gains, including $670 thousand in the third quarter. Unrealized gains on remaining securities, net of tax, totaled approximately $2.453 million in accumulated other comprehensive income.
- The quarterly dividend was $0.02 per share. The company increased its authorized share-repurchase program to 1 million shares and repurchased 50,288 shares during the third quarter.
Guidance, outlook, risks and unusual items
- Management did not provide formal quantitative revenue or earnings guidance. It reported several multi-year contracts and blanket purchase orders, an encouraging sales pipeline and additional sales resources intended to support future growth.
- In September 2017, the company received a five-year U.S. Air Force blanket purchase agreement allowing purchases of up to $5.5 million through September 2022. The agreement does not guarantee purchase quantities or delivery dates. An initial task order of approximately $440 thousand was expected to be fulfilled in the fourth quarter of 2017.
- Manufacturing-cost, efficiency and quality initiatives were continuing, with management expecting potential gross-margin benefits in future quarters. Product-cost, competitive-pricing and contract-manufacturing risks remain.
- A former sales representative asserted claims seeking approximately $6.090 million for alleged unpaid past and future commissions. The company believes the claims lack merit and intends to defend them. The matter was scheduled for mediation on November 14, 2017; no provision was recorded because the outcome could not be determined.
- Purchase orders to suppliers for inventory totaled approximately $11.352 million at September 30, 2017.
- U.S. government agencies represented 43.7% of third-quarter sales and 36.5% of nine-month sales, creating exposure to government budgets, procurement timing and spending limitations.
- Net deferred tax assets were $1.701 million. Management concluded that approximately $129 thousand was more likely than not to be unrealizable due to insufficient Florida taxable income and noted that additional valuation allowances could be required if future losses occur.
- Management stated that existing cash, anticipated operating cash flow and borrowing availability should satisfy foreseeable working-capital needs, while cautioning that economic conditions could restrict access to credit or capital.
- Other risks include technology and product-cycle changes, competition, reliance on suppliers and contract manufacturers, inventory levels, intellectual-property claims, cybersecurity, government regulation, foreign manufacturing, executive retention and maintenance of the company’s exchange listing.
Investor verification items
- Confirm the registrant and corporate-name transition, because the supplied filing is for RELM Wireless Corporation while the request identifies BK Technologies Corp.
- Verify whether the U.S. Air Force blanket purchase agreement generated the anticipated fourth-quarter task-order revenue and whether additional orders were received.
- Monitor operating cash conversion, collections, inventory levels and the $11.352 million of supplier purchase commitments.
- Review the status and potential financial exposure of the former sales representative litigation.
- Verify the renewal, replacement or repayment of the revolving credit facility that matured on December 27, 2017.
- Assess the sustainability of dividends and share repurchases given negative year-to-date operating cash flow and sharply lower nine-month earnings.
- Track the value and concentration risk of the remaining Iteris investment and the effect of future security-price changes on earnings, liquidity and other comprehensive income.
- Evaluate the realizability of deferred tax assets and the expiration schedule of federal and state net operating losses.