Business Context and Reporting Period
BK Technologies, Inc. (formerly RELM Wireless Corporation; company metadata identifies BK Technologies Corp.) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components for government, public safety, business and industrial customers.
On June 4, 2018, the company changed its name to BK Technologies, Inc.; its common stock began trading on the NYSE American under ticker BKTI on June 5, 2018.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net sales | $13.656 million | $10.762 million | $25.402 million | $18.142 million |
| Gross margin | 43.1% | 41.8% | 42.2% | 37.1% |
| Operating income (loss) | $1.331 million | $0.973 million | $2.077 million | ($0.233 million) |
| Net income | $0.947 million | $1.318 million | $0.503 million | $0.050 million |
| Diluted earnings per share | $0.07 | $0.10 | $0.04 | $0.00 |
| Cash flow from operations | Not separately provided | Not separately provided | $0.711 million | ($1.359 million) |
- Q2 sales increased 26.9%; six-month sales increased 40.0% year over year.
- Q2 operating margin was approximately 9.7%, versus 9.0% in the prior-year quarter. Six-month operating margin was approximately 8.2%, versus negative 1.3% in the prior-year period.
- SG&A was $4.554 million in Q2 and $8.644 million for the six-month period. Six-month SG&A declined to 34.0% of sales from 38.4% despite higher absolute spending.
- Cash and cash equivalents were $10.723 million at June 30, 2018, compared with $7.147 million at December 31, 2017. Working capital was approximately $23.4 million.
- Inventories declined to $12.781 million from $14.358 million at year-end 2017. Trade receivables increased to $6.983 million from $5.524 million.
- Total liabilities were $9.029 million and stockholders’ equity was $31.463 million at June 30, 2018.
- The company had no borrowings under its secured revolving credit facility, with $1.0 million available and a December 26, 2018 maturity date. The company reported compliance with applicable covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by state public safety agencies, including California, new state agency customers, federal agencies and international customers.
- Gross margin improved because of favorable product mix, higher production volumes, better overhead absorption, and manufacturing and quality initiatives. The prior-year period included product enhancement expenses and costs related to a discontinued development initiative.
- Six-month operating results improved from a $0.233 million operating loss to $2.077 million of operating income.
- Six-month operating cash flow improved by approximately $2.070 million, from a $1.359 million use of cash to $0.711 million of cash provided. Inventory reductions were a major contributor, partly offset by higher receivables and lower accounts payable.
- Net income declined in Q2 despite stronger operating results because the prior-year quarter included a $0.617 million gain on securities, while Q2 2018 included a $0.055 million unrealized investment loss and weaker other income.
- For the first six months, the company recorded approximately $1.201 million of investment-related losses, including an approximately $0.849 million loss on the sale of Iteris securities and a $0.352 million unrealized loss on PIH securities. The prior-year period included a $0.617 million securities gain.
- The company sold Iteris securities for approximately $8.335 million and invested approximately $3.741 million in PIH through FGI 1347 Holdings, LP. The PIH investment had a June 30 fair value of $3.389 million.
- The company declared a quarterly dividend of $0.02 per share and repurchased 67,440 shares during the quarter for approximately $0.616 million.
- Adoption of ASU 2016-01 reclassified approximately $4.3 million of previously reported unrealized investment gains from accumulated other comprehensive income to accumulated deficit. Adoption of the revenue standard did not materially affect reported revenue.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management described sales prospects for the remainder of 2018 and into the following year as promising, particularly in state and local markets, and planned additional sales and marketing investment.
- The company planned to introduce its first multi-band product later in 2018.
- The company received approximately $4.5 million of orders for BK Radio KNG-series radios and accessories from a California public safety agency. Some orders were fulfilled in Q2, with the remainder anticipated in Q3 2018.
- Management expected the 2018 effective tax rate to decline from 2017 following the reduction in the federal corporate tax rate under the Tax Cuts and Jobs Act. The company had $3.139 million of net deferred tax assets and estimated that approximately $83,000 was more likely than not unrealizable due to Florida NOL limitations.
- Federal government agencies represented 35.0% of Q2 sales and 34.5% of six-month sales, creating customer-concentration exposure.
- Purchase commitments for inventory were approximately $6.380 million at June 30, 2018.
- A settlement with former sales representative The Sales Group required commissions on qualifying 2018 sales in specified states. The company paid $0.231 million during the first six months and accrued an additional approximately $0.290 million for the remainder of 2018. A change in control by year-end could trigger an additional payment obligation, subject to the settlement terms.
- Key stated risks include government budget constraints, competition and technology changes, reliance on contract manufacturers and suppliers, inventory and debt levels, use of deferred tax assets, reliance on U.S. government sales, cybersecurity, intellectual property claims, and maintaining the NYSE American listing.
- The company expects adoption of the new lease standard, effective for periods beginning after December 15, 2018, to result in recognition of right-of-use assets and lease liabilities; its impact was still under evaluation.
Important Facts for Investors to Verify
- Whether the approximately $4.5 million California order is fully delivered and collected as anticipated.
- Whether sales growth and the 42.2% six-month gross margin are sustained after the unusually strong first-half comparison.
- The valuation and volatility of the PIH investment and any further effects on earnings or equity.
- The company’s ability to use federal and state NOLs and whether additional deferred-tax valuation allowances are required.
- Renewal, replacement or repayment arrangements for the $1.0 million revolving credit facility maturing December 26, 2018.
- Remaining obligations under the TSG settlement and the effect of any change-in-control event.
- Customer concentration, supplier commitments, inventory quality and the company’s ability to convert reported earnings into operating cash flow.