BK Technologies Corp. (formerly RELM Wireless Corporation) — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
The filing is for the quarter and nine months ended September 30, 2015. The registrant is identified in the filing as RELM Wireless Corporation, which designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related products under the BK Radio and RELM brands. The company serves government, public safety, business and industrial markets, including products compliant with the APCO Project 25 digital standard.
The financial statements are unaudited and presented in thousands, except per-share and share data.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $7.606 million | $8.670 million | $22.773 million | $25.552 million |
| Gross margin | 45.8% | 43.7% | 42.0% | 42.3% |
| Operating income | $0.300 million | $1.033 million | $1.149 million | $2.672 million |
| Operating margin | 3.9% | 11.9% | 5.0% approximately | 10.5% |
| Net income | $0.212 million | $0.656 million | $0.829 million | $1.802 million |
| Diluted EPS | $0.02 | $0.05 | $0.06 | $0.13 |
- Q3 sales declined 12.3%; nine-month sales declined 10.9%.
- P25 digital product sales declined approximately 19.2% in Q3 and 16.4% for the nine-month period. Management attributed the declines primarily to weaker demand from federal, state and local public safety agencies, including the wildland fire market.
- Q3 gross margin improved because of a more favorable product mix and better manufacturing overhead utilization. Nine-month gross margin was broadly stable year over year.
- SG&A increased to $3.186 million in Q3 and $8.407 million for nine months, versus $2.756 million and $8.141 million, respectively, in the prior-year periods. Higher staffing, sales and marketing costs, commissions, incentives and headquarters professional fees contributed to the increase.
- Government agencies accounted for 46.0% of Q3 sales and 42.8% of nine-month sales, compared with 44.2% and 40.3%, respectively, in the prior-year periods.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was only $56,000 for the first nine months of 2015, compared with $3.300 million in the prior-year period. Working-capital investments included a $1.692 million increase in inventory, a $950,000 increase in accounts receivable and a $648,000 increase in prepaid and other current assets.
- Investing activities used $3.639 million, including $2.761 million for securities purchases and $878,000 for property, plant and equipment.
- Cash and cash equivalents declined to $7.856 million at September 30, 2015, from $11.363 million at December 31, 2014.
- Working capital was approximately $27.0 million, compared with $28.9 million at year-end 2014.
- The company had no borrowings under its secured revolving credit facility at September 30, 2015. The facility had $4.003 million of availability, subject to a borrowing base, and a $5.0 million maximum commitment. The facility matured on December 31, 2015, and management was evaluating financing alternatives beyond that date.
- Total assets were $40.065 million and total liabilities were $5.194 million at September 30, 2015.
Material Changes, Outlook and Unusual Items
- In September 2015, the company received approximately $26.2 million of DHS Tactical Communications Contract awards for radios, repeaters, accessories and services to be deployed by the TSA at more than 400 airports. Approximately $15.5 million was specified in delivery orders, while the remaining $10.7 million related to optional years that were not guaranteed.
- No revenue from the DHS/TSA awards was recognized in Q3 because no equipment had shipped. Management expected shipments to begin in Q1 2016, but stated that the timing of quarterly revenue remained uncertain because of logistical variables.
- The company purchased approximately 1.6 million shares of Iteris in July 2015 for approximately $2.8 million. The investment was recorded at approximately $3.9 million at September 30, 2015, producing a $700,000 after-tax unrealized gain recorded in other comprehensive income rather than earnings.
- Management reported increased requests for quotes and an expanded prospect funnel, and planned to expand sales resources to pursue growth opportunities. No formal numerical revenue or earnings guidance was provided.
- Net deferred tax assets were approximately $5.247 million, supported primarily by federal and state net operating loss carryforwards. Management concluded that realization was more likely than not, but noted that future losses could require a valuation allowance. Federal NOLs were approximately $5.194 million and state NOLs approximately $13.813 million, with expirations beginning in 2018.
- Purchase orders to suppliers totaled approximately $9.474 million at September 30, 2015. The filing reported no pending material legal claims.
- Key risks include dependence on government spending, unpredictable order timing, competition and technology changes, reliance on contract manufacturers and suppliers, inventory and liquidity requirements, utilization of deferred tax assets, and the expiration or refinancing of the revolving credit facility.
- Management stated that disclosure controls were effective as of September 30, 2015 and that no material changes to internal control over financial reporting occurred during the quarter.
Important Facts for Investors to Verify
- Confirm the company’s corporate name and ticker history, because this filing identifies the registrant as RELM Wireless Corporation while the requested company is BK Technologies Corp.
- Verify the actual shipment and revenue-recognition schedule for the $26.2 million DHS/TSA awards, including the status of the $10.7 million optional portion.
- Review the status and subsequent refinancing or replacement of the Silicon Valley Bank credit facility after its December 31, 2015 maturity.
- Assess whether weak public-safety demand and lower P25 sales continued after September 30, 2015.
- Monitor inventory, supplier purchase commitments and operating cash flow, which was nearly breakeven despite positive net income.
- Reassess the valuation and liquidity implications of the Iteris investment and its unrealized gain.
- Evaluate the recoverability of the $5.247 million deferred tax asset, particularly if operating losses recur.