Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2017, filed August 1, 2017. The filing identifies the registrant as RELM Wireless Corporation, not BK Technologies Corp. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components under the BK Radio and RELM brands, serving government, public-safety, business and industrial markets.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $10.762 million | $16.664 million | $18.142 million | $28.733 million |
| Gross profit margin | 41.8% | 33.6% | 37.1% | 32.8% |
| Operating income (loss) | $0.973 million | $2.094 million | ($0.233 million) | $2.860 million |
| Income before taxes | $1.540 million | $2.102 million | $0.151 million | $2.870 million |
| Net income | $1.318 million | $1.365 million | $0.050 million | $1.878 million |
| Diluted earnings per share | $0.10 | $0.10 | $0.00 | $0.14 |
Second-quarter sales increased approximately 45.8% from the first quarter of 2017. P-25 digital products represented 71.1% of second-quarter sales and 72.4% of year-to-date sales. SG&A was $3.5 million in the quarter and $7.0 million year to date. Engineering and product development costs were $1.2 million in the quarter and $2.1 million year to date.
Six-month net cash used in operating activities was $1.359 million, compared with $7.102 million of cash provided in the prior-year period. Investing activities provided $0.450 million, including $0.897 million from securities sales, while capital expenditures were $0.447 million. Financing activities used $2.511 million, primarily for $2.477 million of dividends and $0.217 million of share repurchases.
At June 30, 2017, cash and cash equivalents were $7.490 million, available-for-sale securities totaled $10.045 million, working capital was approximately $24.5 million, and total liabilities were $6.478 million. There were no borrowings under the secured revolving credit facility, which provided $1.0 million of additional availability and matured December 27, 2017.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 35.4%, and six-month sales declined 36.9%, primarily because 2016 included shipments under a U.S. Transportation Security Administration contract that were completed during 2016.
- Sales to government agencies other than the TSA increased approximately 34.3% year over year in the second quarter. Management reported resurgent demand from certain state and federal agencies.
- Gross margin improved substantially, to 41.8% from 33.6% in the quarter and to 37.1% from 32.8% year to date, reflecting product mix, higher production volumes and the absence of the lower-margin TSA business.
- Despite the margin improvement, year-to-date operating results deteriorated to a $0.233 million operating loss from $2.860 million of operating income because of lower sales and higher SG&A as a percentage of sales.
- Year-to-date net income fell to $0.050 million from $1.878 million. The second quarter included a $0.617 million gain on the sale of Iteris securities.
- Cash flow from operations changed from a $7.102 million inflow to a $1.359 million outflow, driven principally by increases in receivables and inventories and payments of accrued compensation.
- The company declared a quarterly dividend of $0.02 per share and increased its common-stock repurchase authorization from 500,000 to 1 million shares. It repurchased 26,800 shares during the quarter.
Guidance, Outlook, Risks and Unusual Items
No quantitative revenue or earnings guidance is provided. Management stated that its sales-prospect funnel was healthy, added sales resources, and expected a manufacturing-improvement initiative to provide benefits in future quarters. Management also stated that cash, anticipated operating cash flow and available borrowing capacity should satisfy working-capital needs for the foreseeable future.
- The company held approximately 1.6 million Iteris shares, representing about 5.0% of Iteris outstanding shares. It sold 163,221 shares for approximately $0.897 million and recognized a $0.617 million gain. The remaining securities are subject to market-price volatility and may be sold earlier than planned to meet liquidity needs.
- A sales representative filed or purported to file litigation seeking approximately $6.090 million for alleged unpaid past and future commissions. The company believes the claim lacks merit and has made no provision; the outcome cannot presently be determined.
- Purchase commitments to suppliers for inventory were approximately $7.128 million at June 30, 2017.
- The company recognized a $0.129 million valuation allowance related to Florida deferred tax assets and stated that additional allowances may be required if future losses occur. Federal and state NOLs were approximately $1.629 million and $11.899 million, respectively, with expirations beginning in 2018.
- Key stated risks include government-budget constraints, reliance on U.S. government customers, competition and technology changes, contract-manufacturer and supplier dependence, inventory levels, debt and liquidity, deferred-tax-asset utilization, legal claims and the volatility of the Iteris investment.
- Disclosure controls were evaluated as effective, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for RELM Wireless Corporation, whereas the request metadata names BK Technologies Corp.
- Assess the sustainability of improved gross margins and the extent to which future sales can replace the completed TSA contract.
- Review operating cash conversion, receivable and inventory growth, and the ability to fund dividends, repurchases and approximately $7.128 million of supplier commitments.
- Verify the status, potential exposure and arbitration prospects of the $6.090 million sales-commission litigation.
- Monitor the market value and concentration risk of the Iteris securities and the effect of future sales on earnings and comprehensive income.
- Evaluate the realizability and expiration schedule of deferred tax assets and NOLs.
- Verify the revolving credit facility’s renewal or replacement after its December 27, 2017 maturity date.