BK Technologies Corporation 2019 Q1 10-Q Summary
Business context and reporting period
BK Technologies designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components under the BK Radio and RELM brands. The report covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. Reported amounts are generally in thousands unless otherwise stated.
On March 28, 2019, BK Technologies Corporation became the holding-company parent of BK Technologies, Inc. through a tax-free reorganization. The transaction was intended to improve corporate efficiency and operational flexibility and did not have a material operational or financial impact. The new parent retained the BKTI ticker and the same directors and executive officers.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $7.644 million | $11.746 million | Down 34.9% |
| Gross margin | 31.9% | 41.2% | Down 9.3 percentage points |
| SG&A | $4.755 million | $4.089 million | Up 16.3% |
| Operating income (loss) | $(2.318) million | $0.748 million | Declined $3.066 million |
| Operating margin | (30.3)% | 6.4% | Down 36.7 percentage points |
| Net loss | $(1.318) million | $(0.443) million | Loss increased $0.875 million |
| Net loss per diluted share | $(0.10) | $(0.03) | More loss per share |
| Cash flow from operations | $(2.308) million | $(3.318) million | Use improved $1.010 million |
| Capital expenditures | $0.829 million | $0.143 million | Up $0.686 million |
Gross profit was approximately $2.437 million. Gross margin was pressured by higher material costs, a sales mix weighted toward lower-margin products and lower production volumes that reduced manufacturing overhead absorption. SG&A increased primarily because of product development, additional sales personnel, holding-company reorganization costs and information-technology security and capability investments.
Other income was $645,000, including a $592,000 unrealized gain on the company’s investment in 1347 Property Insurance Holdings, Inc. This compared with other expense of $1.297 million in the prior-year quarter, which included investment losses. The company recorded a $355,000 income tax benefit, largely non-cash, and reported net deferred tax assets of approximately $3.9 million.
Cash and cash equivalents were $7.540 million at March 31, 2019, down from $11.268 million at December 31, 2018. Working capital was approximately $17.6 million, compared with $21.0 million at year-end. The company had $12.162 million of inventory and $5.045 million of net accounts receivable.
The company had no borrowings outstanding under its secured revolving credit facility and had $1.0 million of borrowing availability. The facility bears interest at the Wall Street Journal prime rate plus 25 basis points, had a stated maturity of December 26, 2019, and is secured primarily by accounts receivable and inventory. The company stated that it was in compliance with all covenants and believed available cash, anticipated operating cash flow and borrowing capacity were sufficient for foreseeable working-capital needs.
Material changes versus the prior comparable period
- Sales declined 34.9%, primarily because federal-agency orders were adversely affected by the U.S. government shutdown in January and February; state and local government demand was also soft.
- Sales to U.S. government agencies increased as a percentage of total sales to 70.7% from 34.0%, creating greater customer-concentration exposure.
- Gross margin fell to 31.9% from 41.2%, while SG&A rose to 62.2% of sales from 34.8%.
- The company moved from $748,000 of operating income to a $2.318 million operating loss and from a $443,000 net loss to a $1.318 million net loss.
- Operating cash use improved year over year but remained significant at $2.308 million. The quarter also included $829,000 of capital expenditures, $256,000 of dividends and $337,000 of share repurchases.
- The company adopted the new lease standard on January 1, 2019, recognizing $2.746 million of operating-lease right-of-use assets and lease liabilities. This was primarily a balance-sheet presentation change.
- Research and development spending increased for the BKR 9000 multiband product and two new portable and mobile radio initiatives intended to succeed the current KNG line.
Guidance, outlook, commentary, risks and unusual items
Management did not provide quantitative revenue or earnings guidance. Management stated that federal and state agency sales activity improved in March and that its pre-shutdown sales prospect funnel remained largely intact. The company expects anticipated sales growth and new-product production later in 2019 to support gross-margin improvement.
The BKR 9000 multiband product was introduced in March 2019. Management is continuing to invest in sales, marketing, engineering and product development to support future growth, but cautioned that product costs, competitive pricing and contract-manufacturing conditions could adversely affect margins.
- Approximately $15.071 million of supplier purchase commitments for inventory existed at March 31, 2019, compared with $12.162 million of inventory on the balance sheet.
- U.S. government agencies accounted for 70.7% of first-quarter sales and $4.255 million of accounts receivable at March 31, 2019.
- The company’s investment in PIH had a fair value of $2.511 million and generated a $592,000 unrealized gain during the quarter. The investment is subject to market volatility and related-party governance considerations.
- Future losses could require a valuation allowance against some or all of the $3.9 million of net deferred tax assets.
- Key disclosed risks include government spending and shutdowns, reliance on government customers, competition, product-development execution, suppliers and contract manufacturers, inventory and liquidity levels, tariffs, cybersecurity, intellectual property, personnel retention and maintaining the NYSE American listing.
- Following the reorganization, BK Technologies Corporation is a holding company dependent on distributions from its subsidiaries to meet obligations, including stockholder dividends.
- No material legal claims were pending as of March 31, 2019. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether federal and state government order activity recovered after the first-quarter shutdown-related disruption.
- Whether sales growth and the BKR 9000 and successor-radio launches improve factory utilization and restore gross margins.
- Whether the company can reduce operating cash burn while continuing product-development spending, dividends and share repurchases.
- The status, renewal or refinancing of the $1.0 million revolving credit facility before its December 26, 2019 maturity.
- The collectability and concentration of government-related receivables and the effect of approximately $15.1 million of supplier purchase commitments.
- The market value and future volatility of the PIH investment, including its impact on reported earnings and cash resources.
- Whether future taxable income supports realization of the $3.9 million deferred tax asset without a valuation allowance.