BK Technologies Corp quarterly report, Q3 FY2016

BK Technologies Corp. (formerly RELM Wireless Corporation) — 2016 Q3 Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2016; filed November 2, 2016. The filing identifies the registrant as RELM Wireless Corporation, the company now known as BK Technologies Corp. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands.

Financial Results and Key Metrics

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
Net sales	$14.7 million	$7.6 million	$43.5 million	$22.8 million
Gross margin	31.4%	45.8%	32.3%	42.0%
Operating income	$1.1 million	$0.3 million	$3.9 million	$1.1 million
Net income	$0.7 million	$0.2 million	$2.6 million	$0.8 million
Diluted earnings per share	$0.05	$0.02	$0.19	$0.06
Operating cash flow	Not separately provided	Not separately provided	$8.3 million	$0.1 million

Sales increased 93.7% in the third quarter and 90.9% for the first nine months, primarily due to U.S. Transportation Security Administration orders.
P-25 digital product sales increased 85.6% in Q3 to $9.7 million and 79.3% for the nine months to $28.1 million.
Operating margins were approximately 7.3% in Q3 and 9.1% for the nine months, versus 3.9% and 5.0%, respectively, in the prior-year periods.
SG&A increased in dollars but declined as a percentage of sales to 24.1% in Q3 and 23.3% for the nine months, from 41.9% and 36.9%, respectively.
Income tax expense was $365,000 in Q3 and $1.4 million for the nine months, primarily non-cash because of the use of net operating loss carryforwards.

Balance Sheet, Cash Flow, Debt and Liquidity

Cash and cash equivalents were $8.6 million at September 30, 2016, up from $4.7 million at December 31, 2015.
Working capital was approximately $24.3 million, including $14.9 million of cash and trade receivables.
Inventory declined to $13.3 million from $16.3 million at year-end 2015, while net accounts receivable increased to $6.2 million from $4.1 million.
Total liabilities were $6.1 million versus $4.6 million at December 31, 2015. The filing reports no long-term debt.
The company had no borrowings under its collateralized Silicon Valley Bank revolving credit facility and had $2.0 million available, subject to borrowing-base limitations. The facility matured December 28, 2016; the company reported covenant compliance as of September 30 and the filing date.
Operating cash flow of $8.3 million was supported by net income, inventory reductions, lower prepaid assets and increases in operating liabilities, partly offset by higher receivables.
Investing cash use was $1.8 million, including $1.3 million for manufacturing and engineering equipment and $481,000 for Iteris securities.
Financing cash use was $2.5 million, primarily two quarterly dividends totaling approximately $2.5 million, plus $83,000 of share repurchases.

Material Changes, Outlook and Unusual Items

The company received approximately $26.2 million of DHS Tactical Communications Contract awards in 2015, with approximately $14.0 million shipped during the first nine months of 2016. The contract was extended through September 27, 2017, but remaining option years were not guaranteed.
A separate $4.2 million TSA accessories order received in February 2016 was fully fulfilled by September 30, 2016. All TSA equipment orders were reported as fulfilled by quarter-end.
TSA-related sales materially increased revenue but reduced gross margins because of competitive pricing. Management stated that margins on non-TSA sales were relatively consistent with prior quarters and that increased volumes and manufacturing efficiencies could improve margins.
U.S. government agencies represented 62.0% of Q3 sales and 59.2% of nine-month sales, compared with 46.0% and 42.8% in the prior-year periods, increasing customer and government-spending concentration.
The company initiated a capital return program, including a $0.09-per-share quarterly dividend and authorization to repurchase up to 500,000 shares. Through September 30, 15,100 shares had been repurchased under the program; 11,200 were repurchased during Q3.
Available-for-sale securities, primarily approximately 1.8 million Iteris shares, were valued at $6.5 million and generated a $1.7 million after-tax unrealized gain recorded in other comprehensive income, not net income.
Management said cash, expected operating cash flow and available credit were sufficient for foreseeable working-capital needs, while cautioning that economic conditions could restrict access to credit or capital.
No material legal claims were pending at September 30, 2016. Purchase commitments to suppliers for inventory were approximately $3.8 million.

Principal Risks and Contingencies

Dependence on U.S. government agencies and government budgets, including the timing and exercise of contract options.
Competitive pricing pressure, particularly on large TSA-related orders, and potential volatility in gross margins.
Reliance on contract manufacturers and suppliers, foreign manufacturing relationships, and inventory management.
Technology changes, competition, product-development execution and the success of the LMR product line.
Realization of deferred tax assets: the company recorded $3.6 million of net deferred tax assets and stated that future losses could require a valuation allowance.
Market and liquidity risk related to the Iteris investment, which may need to be liquidated sooner than expected to meet liquidity requirements.
Other disclosed risks include key-person retention, regulation, intellectual property, cybersecurity, catastrophic events, insurance, exchange listing and equity-market conditions.

Investor Verification Items

Verify the company’s current corporate name and continuity from the RELM Wireless Corporation filing to BK Technologies Corp.
Track TSA and DHS contract-option exercises, post-fulfillment demand and the company’s ability to replace government-driven revenue.
Assess whether gross margins recover after the lower-margin TSA orders and whether operating leverage is sustainable.
Confirm the status, renewal or replacement of the $2.0 million revolving credit facility after its December 28, 2016 maturity.
Review the valuation and concentration risk of the Iteris securities investment and the effect of future market-value changes on comprehensive income and liquidity.
Monitor deferred tax asset utilization, NOL expiration dates beginning in 2018, dividends and share repurchases against operating cash generation.