BK Technologies Corp quarterly report, Q3 FY2020

BK Technologies Corporation 10-Q Summary

Business Context and Reporting Period

BK Technologies Corporation is a holding company whose operating subsidiary designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands. The company primarily serves government, public safety, business and industrial markets. This unaudited report covers the three and nine months ended September 30, 2020, filed November 12, 2020.

Financial Performance and Position

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Net sales	$12.760 million	$11.805 million	$33.586 million	$32.743 million
Gross margin	40.8%	43.3%	40.0%	40.4%
SG&A	$4.158 million	$4.811 million	$13.265 million	$15.247 million
Operating income (loss)	$1.042 million	$0.295 million	$0.158 million	$(2.003) million
Net income (loss)	$0.678 million	$0.238 million	$(0.817) million	$(1.327) million
Basic and diluted EPS	$0.05	$0.02	$(0.07)	$(0.10)

Q3 sales increased 8.1%; nine-month sales increased 2.6%.
Q3 operating income increased 253.2% to $1.042 million. Nine-month results improved from a $2.003 million operating loss to $0.158 million of operating income.
SG&A declined 13.6% in Q3 and 13.0% for the nine-month period, reflecting workforce and other expense reductions.
Gross margin declined 250 basis points in Q3 and 40 basis points for the nine-month period, primarily due to less favorable sales mix and lower manufacturing utilization earlier in the year.
Net cash provided by operating activities was $3.525 million for the nine months, compared with $0.999 million in the prior-year period. Inventory declined $5.087 million, or approximately 37.6% from year-end.
Capital expenditures were $0.742 million, compared with $2.301 million in the prior-year period.
Cash and cash equivalents were $6.381 million at September 30, 2020, compared with $4.676 million at December 31, 2019. Working capital was approximately $14.4 million.
Total debt consisted principally of an equipment loan; note payable balances were $349,000 at September 30, 2020. The company had no borrowings outstanding under its $5.0 million revolving credit facility and reported approximately $2.8 million of availability.
Total liabilities were $13.341 million and stockholders’ equity was $21.645 million at September 30, 2020.

Material Changes Versus Prior Comparable Period

Sales growth was driven primarily by new customers and increased demand from certain federal, state and dealer customers. The 2019 comparison period was affected by the federal government shutdown.
Cost reductions included approximately 18% overall workforce reductions in the second quarter, including approximately 21% in manufacturing and 15% in SG&A-related functions. The company recorded approximately $221,000 of related severance costs in the second quarter.
Engineering and product development expense declined 20.4% for the nine-month period as development activity shifted from external resources to the internal engineering team.
The company recorded an unrealized loss of $0.797 million on its investment in 1347 Property Insurance Holdings for the nine-month period, compared with a $0.186 million gain in the prior-year period.
Cash flow benefited substantially from inventory reduction, although accounts receivable increased $1.814 million and accounts payable decreased $2.182 million during the nine-month period.
The stock repurchase program terminated in April 2020 and was not renewed. Quarterly dividends remained $0.02 per share; approximately $0.752 million was paid during the first nine months.

Guidance, Outlook, Risks and Unusual Items

The company provided no formal quantitative revenue or earnings guidance.
The BKR 5000 portable radio was introduced in August 2020 as the first product in a planned BKR Series, with additional models, including a planned multiband product, expected to follow. Timing and market acceptance remain uncertain.
Orders announced after quarter-end included approximately $1.5 million from a U.S. Department of the Interior agency and approximately $1.1 million from Tennessee, both anticipated for fulfillment in the fourth quarter of 2020. The company also fulfilled approximately $1.1 million of NIFC orders and approximately $3.1 million of firm Department of Energy orders during Q3. A related DoE contract permits purchases of up to $4.2 million through June 2021 but does not guarantee quantities or delivery dates.
COVID-19 had not materially adversely affected the business through the first three quarters, but management expects the pandemic could continue to affect customer demand, government budgets, suppliers, manufacturing, shipping, collections and liquidity. Manufacturing remained open as the company was considered an essential business.
The company received and repaid a $2.196 million Paycheck Protection Program loan in April 2020 after regulatory guidance created uncertainty regarding qualification requirements.
The $5.0 million revolving credit facility expires January 31, 2021, is secured by company assets and requires tangible net worth of at least $20.0 million. The company was in compliance with its covenants at the filing date.
Net deferred tax assets were approximately $4.272 million. Management determined that sufficient future taxable income may not be available to realize the full benefit and recorded a $28,000 valuation allowance for Florida net operating losses expected to expire unused.
Purchase commitments for inventory totaled approximately $6.179 million. The company reported no pending material legal claims as of September 30, 2020.
U.S. government agencies represented 66.4% of Q3 sales and 57.5% of nine-month sales, creating concentration and government-budget risk.
The company disclosed related-party connections involving Fundamental Global, its investment in PIH, and the Itasca consulting agreement. The Itasca agreement was suspended indefinitely; $45,000 had been paid and a potential $100,000 termination fee may apply.

Important Facts for Investors to Verify

Whether Q4 orders and the DoE contract translate into recognized revenue and whether additional BKR Series products launch on schedule.
Whether cost reductions and workforce changes are sustainable without impairing product development, manufacturing capacity or sales execution.
The company’s ability to maintain positive operating cash flow after the inventory reduction benefit normalizes.
Renewal or replacement of the revolving credit facility before its January 31, 2021 expiration and continued compliance with its tangible-net-worth covenant.
The future value and volatility of the PIH investment and its effect on reported earnings.
The duration and severity of COVID-19 impacts on government demand, supply-chain costs, production and collections.
Recoverability of the $4.272 million deferred tax asset and the potential for additional valuation allowances.
Dependence on U.S. government customers, inventory purchase commitments, lease obligations and other contractual liquidity requirements.