BK Technologies Corp. (then RELM Wireless Corporation) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 4, 2016. The filing identifies the registrant as RELM Wireless Corporation, the company associated with BK Technologies Corp. in the request metadata. Financial statements are unaudited.
Business Context and Financial Results
The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components. BK Radio products primarily serve government and public-safety markets, while RELM products serve business and industrial customers. Products include analog and APCO Project 25 digital technologies.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $12.069 million | $8.577 million | +40.7% |
| Gross profit | $3.829 million | $3.683 million | +4.0% |
| Gross margin | 31.7% | 42.9% | -11.2 percentage points |
| SG&A expense | $3.063 million | $2.943 million | +4.1% |
| Operating income | $0.766 million | $0.740 million | +3.5% |
| Income before taxes | $0.768 million | $0.743 million | +3.4% |
| Net income | $0.513 million | $0.538 million | -4.6% |
| Basic and diluted EPS | $0.04 | $0.04 | Unchanged as reported |
P-25 digital product sales increased 24.4% to approximately $7.9 million, representing 65.5% of sales versus 74.1% in the prior-year quarter. SG&A declined as a percentage of sales to 25.4% from 34.3%. Pretax margin was 6.4% versus 8.7%, and net margin was 4.3% versus 6.3%.
Cash Flow, Liquidity, Debt and Balance Sheet
- Operating cash flow was $2.612 million, compared with cash used in operations of $0.617 million in Q1 2015.
- Cash and cash equivalents increased to $6.345 million from $4.669 million at December 31, 2015.
- Working capital was approximately $23.9 million, broadly unchanged from year-end; cash plus trade receivables increased to approximately $13.6 million from $8.8 million.
- Investing cash outflows were $0.936 million, including $0.455 million for manufacturing and engineering equipment and $0.481 million for Iteris common stock.
- There were no financing cash flows. No borrowings were outstanding under the secured revolving credit facility, which provided $2.0 million of availability and matured December 28, 2016.
- Accounts receivable increased to $7.249 million from $4.122 million at year-end, and inventory increased to $17.024 million from $16.282 million.
- Customer deposits were $3.507 million at March 31, 2016, primarily related to a TSA accessories order and a significant contributor to operating cash flow.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by shipments under U.S. Department of Homeland Security/TSA tactical communications awards. The company recognized approximately $3.3 million of sales from these awards in Q1.
- Gross margin contracted materially because of competitive pricing associated with the TSA contract and delivery orders, partially offset by improved manufacturing utilization.
- Operating income increased only modestly despite the substantial sales increase because of the lower gross margin.
- Net income declined despite higher operating income, principally because of higher income tax expense of $0.255 million versus $0.205 million.
- Operating cash flow improved substantially, mainly due to $3.507 million of customer deposits and a $1.860 million increase in accounts payable, partly offset by increases in receivables and inventory.
- Comprehensive income was $0.806 million, including a $0.293 million after-tax unrealized gain on available-for-sale securities. The gain did not affect net income.
Guidance, Outlook, Risks and Unusual Items
- The company expected the remaining original TSA delivery orders to be fulfilled on or before September 30, 2016. It also received a separate $4.2 million TSA accessories order, with the remainder expected to be fulfilled by that date.
- The overall DHS awards totaled approximately $26.2 million, including approximately $15.5 million of specified delivery orders. The remaining $10.7 million of option years was not specified or guaranteed.
- Management stated that requests for quotes and information remained active, the sales prospect funnel was promising, and sales resources had been expanded. No formal earnings or revenue guidance was provided.
- Government agencies represented 55.8% of Q1 sales, up from 49.0% in the prior-year quarter. A Canadian governmental agency represented another 13.75% of sales, increasing customer concentration.
- Purchase commitments for inventory were approximately $11.998 million. No pending material legal claims were reported.
- Management believed cash, expected operating cash flow and available revolver capacity were sufficient for foreseeable working-capital needs, but cautioned that economic conditions could restrict access to credit or capital.
- Key risks include TSA order timing and execution, government budgets and procurement, competitive pricing, reliance on government customers, suppliers and contract manufacturers, inventory levels, technology changes, utilization of deferred tax assets, and the company’s Iteris investment.
- Net deferred tax assets were approximately $5.044 million. Management concluded they were more likely than not to be realized, but future losses could require a valuation allowance. Federal and state NOLs were approximately $4.130 million and $12.330 million, respectively, with expirations beginning in 2018.
Investor Verification Items
- Verify the company-name continuity between the filing’s “RELM Wireless Corporation” designation and BK Technologies Corp.
- Track fulfillment, revenue recognition, margins and cash collections for the TSA delivery orders and the separate $4.2 million accessories order.
- Assess whether the lower TSA-related gross margins persist and whether higher volumes produce the anticipated manufacturing efficiencies.
- Monitor receivables, inventory, customer deposits and the $11.998 million supplier purchase commitments for working-capital and liquidity effects.
- Review government-customer concentration and the timing and certainty of any TSA option-year awards.
- Evaluate the carrying value and market volatility of the Iteris investment, including the $0.690 million after-tax unrealized gain recorded in accumulated other comprehensive income.
- Confirm continued compliance with the revolving-credit facility covenants and the availability and maturity of the $2.0 million credit line.