BK Technologies Corp. (formerly RELM Wireless Corporation) — Q2 2016 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and six months ended June 30, 2016. The registrant was named RELM Wireless Corporation and designed, manufactured and marketed two-way land mobile radios, repeaters, base stations and related equipment under the BK Radio and RELM brands. Results were materially influenced by U.S. Transportation Security Administration (TSA) orders under a Department of Homeland Security tactical communications contract.
Financial Highlights
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $16.7 million | $6.6 million | $28.7 million | $15.2 million |
| Gross margin | 33.6% | 36.2% | 32.8% | 40.0% |
| Operating income | $2.1 million | $0.1 million | $2.9 million | $0.8 million |
| Net income | $1.4 million | $0.1 million | $1.9 million | $0.6 million |
| Diluted EPS | $0.10 | $0.01 | $0.14 | $0.04 |
| Operating cash flow | Not separately provided | Not separately provided | $7.1 million | $0.6 million |
- P-25 digital-product sales increased 156.8% in Q2 to approximately $10.5 million and 76.2% for the six-month period to approximately $18.4 million.
- SG&A increased in absolute dollars but declined to 21.0% of Q2 sales and 22.8% of six-month sales, versus 34.6% and 34.4%, respectively, in the prior-year periods.
- Gross margin declined because of competitive pricing associated with TSA orders, although management reported sequential improvement from the first quarter due to cost reductions and manufacturing efficiencies.
- At June 30, 2016, cash and cash equivalents were $9.1 million, available-for-sale securities were $5.1 million, and working capital was approximately $24.5 million.
- Total liabilities were $8.6 million and stockholders’ equity was $36.6 million. No borrowings were outstanding under the $2.0 million secured revolving credit facility; the facility matured December 28, 2016.
Material Changes Versus the Prior Comparable Period
- Q2 sales increased 152.9%; six-month sales increased 89.5%, primarily due to TSA shipments.
- Q2 operating income increased from $0.1 million to $2.1 million, while six-month operating income increased from $0.8 million to $2.9 million.
- Q2 net income increased from $78,000 to $1.4 million; six-month net income increased from $617,000 to $1.9 million.
- Operating cash flow rose to $7.1 million from $581,000, supported by earnings, higher accounts payable, reduced prepaid balances and a $1.0 million customer deposit, partially offset by a $1.8 million increase in accounts receivable.
- The company initiated a capital-return program, paid a $0.09-per-share quarterly dividend totaling approximately $1.2 million, and repurchased 3,900 shares for $22,000.
- Available-for-sale securities generated a $773,000 after-tax unrealized gain recorded in other comprehensive income, not net income. The securities consisted primarily of an investment in Iteris.
Guidance, Outlook, Risks and Unusual Items
- The company expected to fulfill the remaining TSA delivery orders, including the additional $4.2 million accessory order, by September 30, 2016. Future TSA option years were not specified or guaranteed.
- The original DHS contract awards totaled approximately $26.2 million, with approximately $15.5 million specified in delivery orders. TSA shipments totaled $12.6 million by June 30, 2016.
- Management stated that sales prospects and requests for quotes remained encouraging and expected cash, operating cash flow and borrowing availability to fund foreseeable working-capital requirements and capital expenditures.
- Key risks include substantial dependence on U.S. government agencies, government budgets and procurement timing, TSA order concentration, competitive pricing and lower margins, contract manufacturers and suppliers, technology changes, inventory levels, deferred-tax-asset utilization, and the company’s investment strategy.
- The company reported approximately $6.1 million of supplier purchase commitments for inventory and no pending material legal claims as of June 30, 2016.
- Net deferred tax assets totaled $4.4 million. Management believed realization was more likely than not, but future losses could require a valuation allowance. Federal and state NOLs were approximately $2.0 million and $12.4 million, respectively, with expirations beginning in 2018.
- Management stated that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant’s corporate-name change from RELM Wireless Corporation to BK Technologies Corp. and ensure the filing is matched to the correct issuer.
- Assess the sustainability of the 2016 revenue and earnings surge after completion of the TSA orders and the uncertainty surrounding later option years.
- Monitor gross-margin performance because TSA-related competitive pricing reduced margins materially versus 2015.
- Review government-customer concentration: U.S. government agencies represented 60.3% of Q2 sales and 58.4% of six-month sales.
- Verify the status, renewal or replacement of the revolving credit facility after its December 2016 maturity date.
- Evaluate the market value, liquidity and governance implications of the Iteris investment, including the company’s approximately 5.5% ownership at June 30, 2016.