Business Context and Reporting Period
This unaudited Form 10-Q was filed by RELM Wireless Corporation (the filing does not identify BK Technologies Corp.) for the quarter and six months ended June 30, 2014. The company sells land mobile radio products, with growth concentrated in P25 digital products for public-safety customers.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $9.1 million | $16.9 million |
| Gross margin | 42.8% | 41.6% |
| Operating income | $1.0 million | $1.6 million |
| Pretax income | $1.0 million | $1.6 million |
| Net income | $672,000 | $1.147 million |
| Diluted earnings per share | $0.05 | $0.08 |
| Net income margin | 7.5% | 6.7% |
- P25 digital product sales were approximately $6.6 million in the quarter and $12.3 million year to date, representing approximately 72.6% and 72.8% of sales, respectively.
- Six-month operating cash flow was $1.419 million, compared with cash used in operations of $434,000 in the prior-year period.
- Capital expenditures were $328,000; financing cash flow was $126,000 from common-stock option exercises. Cash increased to $9.162 million from $7.945 million at December 31, 2013.
- At June 30, 2014, working capital was approximately $27.3 million. Trade receivables were $6.255 million and inventories were $10.284 million.
- The company had no borrowings outstanding under its $5 million secured revolving credit facility and reported compliance with its covenants. The facility matured December 31, 2014.
- Total liabilities were $3.689 million and stockholders’ equity was $32.718 million at June 30, 2014.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 46.3% from $6.191 million to $9.057 million; six-month sales increased 27.3% from $13.264 million to $16.882 million.
- Second-quarter net income increased to $672,000 from $197,000; six-month net income increased to $1.147 million from $602,000.
- Operating income increased to $1.038 million from $378,000 for the quarter and to $1.640 million from $877,000 for the six months.
- Gross margin declined from 43.9% to 42.8% for the quarter and from 44.9% to 41.6% year to date, primarily due to product mix, competitive pricing, and manufacturing overhead absorption.
- SG&A increased in dollars but declined as a percentage of sales to 31.3% from 37.8% for the quarter and to 31.9% from 38.3% year to date.
- Accounts receivable increased $3.411 million from year-end, while inventory declined $1.291 million. Management attributed the inventory reduction to targeted inventory initiatives.
- Government agencies accounted for 37.0% of quarterly sales and 38.3% of six-month sales, compared with 21.9% and 34.9%, respectively, in the prior-year periods.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects increased sales volumes, greater P25 penetration, and manufacturing improvements to support future gross-margin improvement, but provided no quantitative earnings or revenue guidance.
- Management believed cash, expected operating cash flow, and available revolver capacity would meet working-capital needs for the foreseeable future. The filing states that borrowing availability was approximately $5 million at June 30, but separately reports approximately $2.751 million at the report date; this discrepancy should be verified.
- Key risks include reliance on U.S. government agencies, government budget constraints, competition, technology changes, contract manufacturers and suppliers, inventory levels, access to capital, management of growth, and maintaining the NYSE MKT listing.
- Net deferred tax assets were approximately $6.406 million, supported primarily by federal and state net operating loss carryforwards. Management concluded the assets were more likely than not realizable, but future losses could require a valuation allowance.
- The company had approximately $4.320 million of supplier purchase orders and reported no pending material legal claims as of June 30, 2014.
- Obsolete inventory disposed of during the first quarter had been fully reserved and had no material financial-statement impact. No software costs were capitalized during the 2014 periods presented.
- Disclosure controls were considered effective as of June 30, 2014, with no material changes in internal control over financial reporting.
Investor Verification Items
- Confirm the issuer identity: the supplied filing is for RELM Wireless Corporation, not BK Technologies Corp.
- Reconcile the reported revolver availability of approximately $5 million at June 30 with the approximately $2.751 million amount reported at the filing date.
- Assess sustainability of P25-driven sales growth and the company’s significant dependence on U.S. government customers.
- Evaluate whether lower gross margins, competitive pricing, and product-mix pressures could offset operating leverage.
- Review the realizability of the $6.406 million deferred tax asset and the expiration schedule for related NOLs.
- Verify the company’s ability to fund approximately $4.320 million of supplier purchase commitments while maintaining liquidity.