BK Technologies Corporation 2021 Form 10-K Summary
Business Context and Reporting Period
BK Technologies Corporation is a holding company whose operating subsidiary designs, manufactures and markets American-made two-way land mobile radios, repeaters, base stations and related components. Products serve primarily government, public safety, military and emergency-response customers, with additional business and industrial sales. The filing covers the fiscal year ended December 31, 2021, with comparisons to fiscal 2020.
Sales were substantially concentrated in government and public safety markets. U.S. Government sales represented approximately 35.5% of 2021 revenue versus 50.5% in 2020. The Company competes primarily with larger providers, including Motorola Solutions.
Financial Performance and Condition
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $45.4 million | $44.1 million | Up approximately 2.8% |
| Gross profit margin | 35.8% | 40.8% | Down 5.0 percentage points |
| SG&A expense | $17.5 million | $17.0 million | Up approximately $0.5 million |
| Operating income (loss) | $(1.2) million | $1.0 million | Declined approximately $2.2 million |
| Loss before income taxes | $(1.5) million | $0.2 million | Declined approximately $1.7 million |
| Net income (loss) | $(1.7) million | $0.2 million | Declined approximately $1.9 million |
| Basic and diluted earnings per share | $(0.11) | $0.02 | Turned negative |
| Cash flow from operating activities | $(6.3) million | $4.4 million | Declined approximately $10.7 million |
| Cash flow from investing activities | $(2.3) million | $(0.9) million | Higher capital spending |
| Cash flow from financing activities | $12.4 million | $(1.3) million | Benefited from equity offering and borrowings |
Gross margin deterioration primarily reflected higher material, component and freight costs, supply-chain constraints and approximately $0.7 million of inventory charges, including reserves related to the legacy KNG product line. Engineering and product-development expense was approximately $8.1 million, focused largely on the BKR product family.
At December 31, 2021, cash and cash equivalents were approximately $10.6 million, total current assets were $37.4 million, current liabilities were $12.2 million, and working capital was approximately $25.2 million. Inventories increased to $17.0 million from $10.5 million, while trade accounts receivable increased to $8.2 million from $6.5 million.
Total debt included approximately $1.5 million outstanding under the revolving credit facility and $0.9 million of equipment notes. The $5 million revolving facility was extended in January 2022 to January 31, 2023. The facility is secured, subject to borrowing-base availability, and requires compliance with a $20 million tangible-net-worth covenant. The Company reported compliance with all covenants at December 31, 2021 and the filing date.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but supply-chain limitations prevented the Company from converting strong customer demand into shipments.
- Backlog increased to approximately $13.1 million from $5.9 million, primarily because of delayed fulfillment.
- Gross margin declined from 40.8% to 35.8%, driving a shift from operating income to operating loss.
- Operating cash flow shifted from $4.4 million provided to $6.3 million used, principally because of increased inventory and receivables.
- The Company raised net proceeds of approximately $11.6 million through a June 2021 public offering of 4,249,250 shares, increasing outstanding shares and stockholders’ equity.
- Capital expenditures increased to approximately $2.4 million from $0.9 million, primarily for manufacturing and engineering equipment.
- The Company changed its inventory accounting method effective July 1, 2021 and retrospectively adjusted 2020 results. Management stated the change did not materially affect 2021 operating loss, net loss or earnings per share.
- The Company declared and paid four quarterly dividends totaling approximately $1.2 million in 2021 and authorized a new share repurchase program of up to $5 million in December 2021. No repurchases were reported under the new program during 2021.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Management expects to fulfill many backlog orders during the first half of 2022, but stated that the timing and magnitude of quarterly shipments cannot be quantified because supply-chain conditions remain uncertain.
The BKR Series, including the first model launched in 2020, is intended to replace the KNG and KNG2 product lines and expand the addressable public-safety market. Additional product introductions remain subject to development, customer acceptance, supply availability and government purchasing cycles.
- Semiconductor and component shortages have increased lead times, costs and inventory levels and may continue for several quarters or years.
- The Company depends on government and public-safety spending, including U.S. Government contracts that are subject to competitive bidding, budget appropriations, audits, termination rights and compliance requirements.
- Approximately 31% of 2021 material, subassembly and product procurements came from seven suppliers; certain components have single sources and there are no guaranteed supply arrangements.
- The Company relies on a limited product portfolio and faces substantial competition from larger, better-capitalized companies.
- COVID-19, geopolitical instability, the Russia-Ukraine conflict, inflation, economic conditions and access to capital could adversely affect customers, suppliers, operations and liquidity.
- Net deferred tax assets were approximately $4.1 million after a $0.6 million valuation allowance. Additional valuation allowances may be required if future taxable income is insufficient.
- The Company held an investment in FG Financial Group with a year-end fair value of approximately $1.8 million and recorded an unrealized loss of approximately $0.2 million in 2021.
- The Company had approximately $12.6 million of inventory purchase commitments at year-end and approximately $2.7 million of lease liabilities, excluding other debt obligations.
- No material legal proceedings were pending as of December 31, 2021. Management reported effective disclosure controls and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the $13.1 million backlog converted into shipments and revenue during the first half of 2022 and whether supply constraints continued.
- Whether gross margins recovered from the 35.8% 2021 level as component, freight and inventory costs normalized.
- Cash generation, inventory turnover and receivables collection, given the $6.3 million operating cash outflow in 2021.
- Utilization, availability and covenant compliance under the $5 million revolving credit facility through its January 31, 2023 maturity.
- Progress, timing and customer acceptance of additional BKR Series products, including the delayed multiband product.
- The sustainability of quarterly dividends and the potential use of the authorized $5 million share repurchase program while the Company remains loss-making.
- Realizability of the $4.1 million net deferred tax asset and the potential for additional valuation allowances.
- Exposure to key suppliers, international sourcing, government procurement risk and the continuing effects of COVID-19 and geopolitical disruptions.