BK Technologies Corp. (filed as RELM Wireless Corporation) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 9, 2012. The financial statements are unaudited and presented in thousands, except per-share and share data.
Business context and reporting period
The company manufactures and sells land-mobile-radio products, including P25 digital two-way radios, primarily to government and public-safety customers. United States government agencies represented 32.4% of sales in Q1 2012, compared with 49.0% in Q1 2011.
In March 2012, the company was named a qualified supplier under the Department of Homeland Security Tactical Communications contract. The contract has a maximum stated value of $3 billion, but it does not specify purchase dates or quantities for the company and therefore does not represent committed revenue.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $4.369 million | $6.714 million |
| Gross profit | $1.667 million | $2.601 million |
| Gross margin | 38.2% | 38.7% |
| Operating loss | $673,000 | $647,000 |
| Pretax loss | $678,000 | $688,000 |
| Income tax benefit | $277,000 | None |
| Net loss | $401,000 | $688,000 |
| Basic and diluted loss per share | $0.03 | $0.05 |
| Cash provided by operating activities | $777,000 | $323,000 |
| Capital expenditures | $19,000 | $118,000 |
Sales declined 34.9%, driven entirely by lower P25 digital product sales to federal, state and local government agencies. P25 sales were $2.2 million, or 49.8% of total sales, versus $4.5 million, or 67.4%, in the prior-year quarter.
SG&A expense declined 28.0% to $2.3 million, primarily because of reductions in engineering, product development, marketing, selling, headquarters and public-company expenses. The lower expense base substantially reduced the net loss, although the operating loss increased modestly because of lower sales and manufacturing-volume absorption.
At March 31, 2012, cash and cash equivalents were $3.471 million, working capital was approximately $19.1 million, and total assets were $30.973 million. Inventory was $12.533 million, including approximately $2.817 million of reserves for slow-moving, excess or obsolete inventory.
The company had no borrowings under its secured revolving credit facility. The facility has maximum availability of $5.0 million, subject to a borrowing base, matures December 31, 2012, and had approximately $2.623 million of availability at March 31, 2012. The company reported compliance with all covenants.
Material changes versus the prior comparable period
- Net sales decreased $2.345 million, or 34.9%.
- P25 digital product sales decreased approximately $2.3 million.
- Gross margin declined slightly from 38.7% to 38.2% because of lower manufacturing volumes and a less favorable product mix.
- SG&A expense decreased approximately $908,000, or 28.0%.
- Operating loss increased from $647,000 to $673,000, despite the SG&A reductions.
- Pretax loss improved by approximately $10,000, while net loss improved by $287,000 primarily because of the $277,000 income tax benefit.
- Operating cash flow increased from $323,000 to $777,000, principally because of collections of trade receivables.
- Cash increased from $2.693 million at December 31, 2011 to $3.471 million at March 31, 2012.
- The company had no revolving-credit borrowings in Q1 2012, compared with net borrowings of $300,000 in Q1 2011.
Outlook, risks, contingencies and unusual items
Management stated that it believes the company is strategically positioned to pursue sales opportunities with federal, state and local government and public-safety agencies. Management expects higher sales volumes and greater P25 sales, together with manufacturing improvements, could improve gross margins; no quantitative revenue or earnings guidance was provided.
The DHS TacCom contract is a potential sales opportunity but carries no specified purchase commitments. The company is dependent on government customers and is exposed to government budget deficits, spending limitations and procurement timing.
The company reported a primarily non-cash income tax benefit of $277,000. Net deferred tax assets were approximately $8.449 million, mainly related to federal and state net operating losses. A valuation allowance of approximately $250,000 was maintained, and additional allowances may be required if future losses occur or expected taxable income is not generated.
Other risks include competition, technological change, limited radio spectrum, reliance on contract manufacturers, inventory levels, access to capital, variable-rate debt exposure and general economic conditions. Purchase orders to suppliers totaled approximately $3.714 million at March 31, 2012. No pending material legal claims were reported.
Disclosure controls and procedures were determined to be effective as of March 31, 2012, and no material changes in internal control over financial reporting were identified during the quarter.
Important facts for investors to verify
- Confirm that the filing entity, RELM Wireless Corporation, corresponds to the requested BK Technologies Corp. issuer and review any subsequent name or corporate changes.
- Track whether the DHS TacCom contract produces actual orders, revenue and cash receipts, since the contract specifies no supplier purchase quantities or timing.
- Assess the sustainability of government demand and the effect of government budget constraints on P25 sales.
- Monitor inventory of $12.533 million and the $2.817 million obsolescence reserve.
- Review the December 31, 2012 maturity and borrowing-base availability of the revolving credit facility.
- Evaluate the realizability of the approximately $8.449 million deferred tax asset and the potential for additional valuation allowances.
- Determine whether cost reductions can offset the effect of lower sales and restore operating profitability.