BK Technologies Corporation — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands. The company primarily serves government, public safety, business and industrial customers. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the same periods in 2019. The company remained an essential business during the COVID-19 pandemic and kept manufacturing operations open.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $9.937 million | $13.294 million | $20.826 million | $20.938 million |
| Gross margin | 43.6% | 42.9% | 39.5% | 38.9% |
| Operating income (loss) | $(36,000) | $20,000 | $(884,000) | $(2.298 million) |
| Net loss | $(302,000) | $(247,000) | $(1.494 million) | $(1.565 million) |
| Loss per share | $(0.02) | $(0.02) | $(0.12) | $(0.12) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $3.597 million | $(1.333 million) |
Q2 sales declined 25.3% year over year, while first-half sales were essentially unchanged. Gross profit was approximately $4.328 million in Q2 and $8.223 million for the first six months. SG&A decreased 23.2% year over year in Q2 to $4.364 million and decreased 12.7% for the first six months to $9.107 million.
At June 30, 2020, cash and cash equivalents were $6.939 million, total current assets were $21.457 million, total current liabilities were $8.011 million and working capital was approximately $13.4 million. Inventories declined to $9.527 million from $13.513 million at December 31, 2019. Total assets were $34.610 million and stockholders’ equity was $21.160 million.
The company had no borrowings outstanding under its $5.0 million revolving credit facility and reported approximately $3.9 million of availability. The facility expires January 31, 2021, bears interest at one-month LIBOR plus 1.90%, is secured by company assets and requires a minimum tangible net worth of $20.0 million. The company was in compliance with its covenants. Separately, equipment financing had an original principal amount of $425,000, bears interest at 5.11% and matures in September 2024.
Material Changes Versus Prior Comparable Period
- Q2 sales fell $3.357 million, or 25.3%, primarily reflecting stronger federal and state demand in Q2 2019 and likely COVID-19-related procurement effects in 2020.
- First-half sales decreased only $112,000, or approximately 0.5%, as stronger Q1 sales offset the Q2 decline.
- Gross margins improved 70 basis points in Q2 and 60 basis points for the first six months, driven by product mix, manufacturing volumes and workforce-related cost reductions.
- SG&A declined $1.317 million in Q2 and $1.329 million for the first six months, partly due to reduced employment and lower product-development spending.
- The six-month operating loss improved by approximately $1.414 million, or 61.5%, compared with the prior year.
- The company generated $3.597 million of operating cash flow versus using $1.333 million in the prior-year period, principally because inventory declined by approximately $3.9 million.
- The six-month investment result changed from a $444,000 gain in 2019 to a $506,000 unrealized loss in 2020.
- The company reduced its workforce by approximately 18% in May 2020 and recorded $221,000 of severance costs. Manufacturing employment declined approximately 21% and SG&A employment declined approximately 15% during Q2.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide quantified financial guidance. It stated that cash, cost-saving initiatives, anticipated operating cash flow and available borrowing capacity should meet working-capital needs for the foreseeable future.
- The initial BKR Series product was completed and was expected to be available for sale during the second half of 2020. Timing and demand remain uncertain, particularly because of COVID-19.
- Management expects the COVID-19 pandemic and its economic effects to continue adversely affecting customer orders, supply-chain availability, manufacturing, shipping, cash flow and future operating results. The company cannot isolate the precise direct effect of COVID-19 on reported results.
- U.S. government agencies represented 43.0% of Q2 sales and 52.1% of first-half sales, creating exposure to government budgets, procurement timing, contract compliance and customer concentration.
- The company received approximately $2.196 million under the Paycheck Protection Program in April 2020 but repaid the loan in full after regulatory guidance created uncertainty about eligibility.
- As of June 30, 2020, the company had approximately $6.636 million of inventory purchase commitments.
- The company’s $4.344 million net deferred tax asset requires future taxable income for full utilization. Management concluded that it could not currently generate sufficient taxable income to use the entire benefit and recorded a $28,000 valuation allowance for Florida net operating losses expected to expire unused.
- The company recognized a $200,000 Q2 and $506,000 six-month unrealized loss on its investment in 1347 Property Insurance Holdings, Inc.; the investment had a fair value of $2.129 million at June 30, 2020.
- The stock repurchase program terminated in April 2020 and was not renewed. The company repurchased 16,129 shares in April at an average price of $1.63 per share. A quarterly dividend of $0.02 per share was declared in June and paid in July.
- The company entered into a consulting agreement with Itasca Financial LLC, an affiliate connected to its largest stockholder, Fundamental Global. The company paid $45,000, agreed to a potential $100,000 termination fee and subsequently suspended the agreement indefinitely. Related-party relationships and potential conflicts should be reviewed.
- No material claims or legal matters were pending as of June 30, 2020. Management concluded that disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Whether COVID-19 causes additional declines in government and public-safety orders or disrupts the company’s supply chain and BKR Series launch.
- The sustainability of improved gross margins and lower SG&A after the workforce reductions and inventory drawdown.
- Whether positive operating cash flow can continue without further inventory reductions, particularly while the company remains unprofitable.
- The renewal or refinancing of the $5.0 million credit facility before its January 31, 2021 expiration and compliance with the $20.0 million tangible-net-worth covenant.
- The collectability and utilization of the $4.344 million deferred tax asset and any future valuation allowances.
- Volatility and governance implications of the PIH investment and the company’s relationships with Fundamental Global and Itasca Financial.
- The concentration of sales with U.S. government agencies, purchase commitments of approximately $6.636 million and the company’s ability to fund dividends and other capital-return activities.