Business Context and Reporting Period
This Form 10-K covers RELM Wireless Corporation, now associated with BK Technologies Corp., for the fiscal year ended December 31, 2013. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components under the BK Radio and RELM brands. Government and public safety customers represented approximately 94% of 2013 sales; business and industrial customers represented approximately 6%.
The company’s digital products comply with the APCO Project 25 standard. It operates in a mature, competitive market characterized by migration from analog to digital systems, constrained government budgets and significant competition from larger suppliers, particularly Motorola Solutions.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $27.023 million | $27.576 million | Down 2.0% |
| Gross profit | Approximately $11.747 million | Approximately $13.065 million | Down approximately 10% |
| Gross margin | 43.5% | 47.4% | Down 3.9 percentage points |
| Operating income | $1.641 million | $2.893 million | Down approximately 43% |
| Net income | $1.142 million | $2.065 million | Down approximately 45% |
| Basic and diluted EPS | $0.08 | $0.15 | Down $0.07 |
| Cash flow from operations | $1.990 million | $4.604 million | Down approximately 57% |
| Capital expenditures and capitalized software | $0.678 million | $0.739 million | Down approximately 8% |
| Cash and cash equivalents | $7.945 million | $6.581 million | Up $1.364 million |
| Working capital | Approximately $25.7 million | Approximately $23.6 million | Up approximately $2.1 million |
SG&A expense declined slightly to $10.106 million from $10.172 million, but increased as a percentage of sales to 37.4% from 36.9%. Research and development expense increased to $3.851 million from $3.667 million. The effective income tax rate was 31.09%; approximately $0.499 million of the $0.515 million tax expense was deferred and largely non-cash.
At year-end, total assets were $34.023 million, total liabilities were $2.603 million and stockholders’ equity was $31.420 million. Net inventory declined to $11.575 million from $13.345 million. The allowance for obsolete and slow-moving inventory increased to approximately $2.960 million from $2.832 million.
Material Changes Versus the Prior Comparable Period
- Sales declined modestly because lower federal-agency sales, including USDA and DOI customers, offset gains with military and state and local public safety agencies.
- P-25 digital product sales were approximately $17.7 million, or 65.4% of sales, compared with $17.9 million, or 65.0%, in 2012.
- Gross margin contracted because of less favorable product mix, competitive pricing pressure, lower sales volume and under-absorption of manufacturing overhead.
- Operating income and net income declined substantially despite slightly lower SG&A expense.
- Operating cash flow decreased primarily because of lower earnings, higher accounts receivable and increased prepaid expenses, partly offset by a $1.642 million reduction in inventory.
- Cash increased by $1.364 million, and total liabilities declined by approximately $1.173 million.
- Backlog increased to approximately $2.5 million at December 31, 2013, from $2.3 million at December 31, 2012.
- U.S. Government sales declined to approximately 34% of total sales from 39%; international sales declined to $0.6 million from $1.4 million.
Debt, Liquidity and Capital Resources
The company had no borrowings outstanding under its $5.0 million secured revolving credit facility with Silicon Valley Bank at December 31, 2013. Approximately $3.0 million was available under the facility at year-end, subject to the borrowing base and covenants. The facility matured on December 31, 2014, and the company reported compliance with all covenants.
Management stated that cash, anticipated operating cash flow and borrowing availability were sufficient for foreseeable working capital needs. The company paid no cash dividends and had no intention to do so in the foreseeable future; the credit facility also restricted dividends. No shares were repurchased despite authorization for up to $2.5 million of repurchases through December 31, 2013.
Material commitments included approximately $4.922 million of inventory purchase commitments, future lease payments totaling approximately $2.417 million under disclosed leases, and ongoing royalties under a digital-technology license. No off-balance-sheet arrangements or pending material legal matters were reported.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It cited a healthier sales-prospect pipeline, passage of a federal budget and expected increases in land mobile radio procurement activity, and stated that the company was positioned for profitable sales growth. Management also expects potential gross-margin improvement from higher volumes, increased P-25 sales and manufacturing efficiencies.
- Demand is highly dependent on government and public safety budgets, appropriations and competitive contract awards; seasonality can make second- and third-quarter results stronger than first- and fourth-quarter results.
- The company depends on continued adoption and successful development of P-25 digital products and faces rapid technological change and product-obsolescence risk.
- Approximately 72.2% of 2013 material, subassembly and product procurements were sourced internationally, and approximately 53.1% were sourced from one supplier. Disruptions could delay production.
- The company relies on contract manufacturers and has no guaranteed supply arrangements with suppliers.
- Approximately $6.909 million of net deferred tax assets were recorded, supported by management’s conclusion that realization was more likely than not. Future losses could require a valuation allowance.
- Cash of approximately $7.695 million exceeded FDIC insurance limits at year-end.
- Government sales concentration, competitive pressure, inventory obsolescence, limited intellectual-property protection, key-person dependence and potential exchange-listing risks could materially affect results.
- The filing reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
Most Important Facts to Verify
- Confirm the corporate-name relationship between the filing registrant, RELM Wireless Corporation, and BK Technologies Corp. specified in the request.
- Reconcile the sharp decline in gross margin and operating income with product mix, pricing, manufacturing utilization and inventory-reduction actions.
- Assess the sustainability of the company’s government and public safety customer base, including U.S. Government sales concentration and contract backlog.
- Evaluate whether the $6.909 million deferred tax asset remains realizable and whether future results could trigger a valuation allowance.
- Review supplier concentration, international sourcing exposure and the $4.922 million of inventory purchase commitments.
- Confirm the renewal or replacement status of the revolving credit facility after its December 31, 2014 maturity date.
- Monitor inventory quality, including the $2.960 million obsolete and slow-moving inventory reserve, and the adequacy of warranty and receivable allowances.