BK Technologies Corporation: FY2019 Form 10-K 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 components. Products are sold primarily to government, public safety and military customers under the BK Radio brand, and to business and industrial customers under the RELM brand. The company operates in one reportable segment.
This filing covers the fiscal year ended December 31, 2019, with comparison to fiscal 2018. On March 28, 2019, the company completed a tax-free holding-company reorganization that created BK Technologies Corporation as the parent of BK Technologies, Inc.; management stated that the transaction had no material operational or financial impact.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Sales | $40.1 million | $49.4 million | Down 18.8% |
| Gross profit margin | 39.0% | 40.5% | Down 150 basis points |
| SG&A expense | $20.0 million | $17.6 million | Up 14.1% |
| Operating income (loss) | $(4.4) million | $2.4 million | Declined $6.8 million |
| Other income (expense), net | $0.8 million | $(2.9) million | Improved $3.7 million |
| Net income (loss) | $(2.6) million | $(0.2) million | Loss increased |
| Basic and diluted loss per share | $(0.21) | $(0.01) | Declined |
| Cash flow from operations | $(2.5) million | $5.3 million | Declined $7.8 million |
Sales declined primarily because large purchases by California and Canadian public safety agencies in prior years did not recur, while the federal government shutdown also affected the first quarter. Government and public safety sales represented approximately 93% of 2019 sales, compared with 95% in 2018. U.S. Government sales increased to approximately 49.1% of total sales from 40.0%.
Gross margin contracted because of lower manufacturing volumes, under-absorption of manufacturing and support costs, and a less favorable product mix. SG&A increased largely because engineering and product-development expenses rose to $9.8 million from $7.8 million, primarily for the BKR Series, including a planned multiband radio.
The company recognized a $0.7 million unrealized gain on its investment in 1347 Property Insurance Holdings, compared with a $2.7 million investment-related loss in 2018. The $1.0 million income-tax benefit was largely non-cash. Net deferred tax assets were $4.4 million at year-end; future losses could require a valuation allowance.
- Cash and cash equivalents: $4.7 million at December 31, 2019, versus $11.3 million at December 31, 2018.
- Working capital: approximately $14.5 million, versus $21.0 million at the prior year-end.
- Inventory: $13.5 million, up from $11.5 million; the obsolete and slow-moving inventory allowance increased to $0.8 million from $0.6 million.
- Trade receivables, net: $4.0 million, down from $5.7 million.
- Stockholders’ equity: $23.3 million, down from $27.7 million.
- Backlog: approximately $7.2 million, down from $7.6 million.
Debt, capital allocation and material changes
The company had no borrowings under its prior revolving credit facility when it matured on December 26, 2019. In September 2019, it entered into a $425,000 equipment loan payable over five years at a fixed 5.11% interest rate; $0.3 million remained outstanding after the current portion at year-end.
On January 30, 2020, the operating subsidiary entered into a new $5.0 million revolving credit facility with JPMorgan Chase, expiring January 31, 2021. Availability is subject to a borrowing base based on receivables and inventory. The facility is secured by substantially all personal property and requires tangible net worth of at least $20.0 million. It also restricts dividends, indebtedness, liens, acquisitions, asset sales and stock repurchases.
During 2019, the company paid approximately $1.0 million in dividends and repurchased 267,350 shares for approximately $1.0 million. The quarterly dividend was $0.02 per share, and the board declared another $0.02 per-share dividend for April 2020. The company believes cash, expected operating cash flow and the new credit facility are sufficient for foreseeable working-capital needs, although access to capital could be constrained by economic conditions.
Adoption of the lease standard resulted in recognition of approximately $2.9 million of right-of-use assets and $3.0 million of lease liabilities. The company had no off-balance-sheet arrangements and no pending material legal proceedings at December 31, 2019.
Guidance, outlook, risks and unusual items
Management expected demand from established state and federal agencies to improve in 2020 and reorganized sales resources to target markets with greater growth potential. The filing does not provide formal revenue, earnings or margin guidance.
The planned BKR Series launch was delayed. The initial product was anticipated for the first half of 2020, with additional models in late 2020 and early 2021; the multiband product was expected in late 2020 after design changes identified by a new Chief Technology Officer. Timing and market acceptance remained uncertain.
In early 2020, Chinese supply-chain partners temporarily suspended or modified operations because of the coronavirus outbreak. The company reported no impact through the filing date but warned that a prolonged outbreak could disrupt component availability, manufacturing, shipments, operating results and cash flow.
- Customer concentration: approximately 49% of sales came from the U.S. Government, and government procurement is subject to budgets, competitive bidding, audits, cancellation rights and regulatory compliance.
- Supplier concentration: approximately 67% of procurement was sourced internationally and approximately 64% of material, subassembly and product purchases came from three suppliers, with no guaranteed supply arrangements.
- Product and technology risk: the company depends on LMR products and must successfully develop and commercialize the BKR Series while competing with substantially larger providers, particularly Motorola Solutions.
- Inventory and margin risk: lower sales and higher inventory levels could lead to additional markdowns, obsolescence charges or further margin pressure.
- Liquidity and covenant risk: the new revolving facility includes collateral, restrictive covenants and an accelerated repayment risk upon default.
- Investment risk: the company held 477,282 PIH shares with a year-end fair value of approximately $2.6 million and an unrealized loss of approximately $1.1 million.
- Holding-company risk: BK Technologies Corporation depends on distributions from its operating subsidiary to fund obligations and dividends.
- Control and audit status: management reported effective disclosure controls and internal control over financial reporting; the company is a smaller reporting company and was not required to obtain an auditor’s opinion on internal control effectiveness.
Most important facts for investors to verify
- Whether sales recover from the 2019 decline and whether federal, state and local government orders convert into shipments.
- The launch timing, regulatory approval, cost, functionality and customer acceptance of the BKR Series and multiband products.
- Inventory turns, obsolescence reserves and gross-margin recovery as production volumes change.
- Cash burn, borrowing-base availability and compliance with the $20.0 million tangible-net-worth covenant.
- The effect of coronavirus, international sourcing concentration, tariffs and single-source components on production and delivery.
- The sustainability of quarterly dividends and stock repurchases while the company is loss-making and generating negative operating cash flow.
- The realizability of the $4.4 million net deferred tax asset if operating losses continue.
- The valuation and governance implications of the PIH investment and the significant ownership influence of Fundamental Global and its affiliates.