Business Context and Reporting Period
This unaudited Form 10-Q covers RELM Wireless Corporation, despite the request metadata identifying BK Technologies Corp. (the filing’s registrant name), for the quarter and six months ended June 30, 2011. The company develops and sells land mobile radio products, including P25 digital products and its KNG product line. Results are not necessarily indicative of full-year performance.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $4.671 million, versus $7.079 million | $11.385 million, versus $13.527 million |
| Gross margin | 35.5%, versus 48.1% | 37.4%, versus 47.1% |
| Operating income (loss) | $(828,000), versus $543,000 | $(1.475) million, versus $557,000 |
| Net income (loss) | $(855,000), versus $339,000 | $(1.543) million, versus $340,000 |
| Basic earnings (loss) per share | $(0.06), versus $0.03 | $(0.11), versus $0.03 |
| Cash flow from operations | Not separately provided | $(935,000), versus $556,000 provided |
Gross profit was approximately $1.656 million in the second quarter and $4.257 million for the first six months. SG&A expense declined to $2.484 million for the quarter and $5.732 million for the six months, but increased materially as a percentage of sales because of lower revenue. Interest expense was $27,000 for the quarter and $62,000 for the six months, compared with none in the prior-year periods.
At June 30, 2011, cash and cash equivalents were $4.234 million, total current assets were $22.532 million, and working capital was approximately $19.3 million. Inventory was $12.992 million, including approximately $2.670 million of reserves for slow-moving, excess, or obsolete inventory. Total assets were $33.018 million and stockholders’ equity was $26.938 million.
Outstanding secured revolving-credit borrowings were $2.300 million. The facility had a $5.000 million maximum subject to a borrowing base, approximately $334,000 of additional availability, a variable interest rate of 3.75% at quarter-end, and a maturity date of December 31, 2012.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales decreased approximately 34.0%; six-month sales decreased approximately 15.8%.
- P25 digital product sales declined to $2.5 million, or 53.8% of quarterly sales, from $4.4 million, or 62.5%; six-month P25 sales declined to $7.0 million from $8.9 million.
- Gross margin fell 12.6 percentage points in the quarter and 9.7 percentage points for the six months, primarily because early production of new products generated higher material and labor costs and lower production volumes reduced overhead absorption.
- Operating performance moved from income to loss, producing a six-month net loss of $1.543 million compared with prior-year net income of $340,000.
- Operating cash flow changed from $556,000 provided to $935,000 used. Inventory increased by approximately $1.1 million, while accounts payable decreased by approximately $826,000.
- Cash declined by $816,000 during the first six months, from $5.050 million to $4.234 million. Financing activities provided $300,000 through net borrowings.
- Depreciation and amortization increased to $704,000 from $317,000, reflecting amortization of capitalized software launched in connection with new products.
- The company increased its deferred-tax-asset valuation allowance to approximately $2.154 million from $320,000 at December 31, 2010, reflecting reduced confidence in realizing part of its tax assets.
- Sales to U.S. government agencies declined to 38.6% of quarterly sales and 44.8% of six-month sales, from 65.6% and 68.8%, respectively, in the prior-year periods.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that federal agencies had deferred some land mobile radio purchases despite enactment of the 2011 federal budget. Management expected conditions could improve in the third quarter as agencies generally spend remaining funds before the federal fiscal year-end on September 30, 2011, while pursuing state and local public-safety P25 opportunities.
Management reported that recent production runs showed lower material costs and improved labor efficiency and expected gross-margin improvement from higher volumes, increased P25 sales, and manufacturing improvements. Additional KNG products and capabilities were described as planned for coming quarters. No formal quantitative revenue or earnings guidance was provided.
On June 22, 2011, the lender amended the revolving-credit agreement by increasing certain eligible-inventory and government-account thresholds, reducing the required adjusted quick ratio to 1.00-to-1.00, and waiving a potential borrowing-base default for the period from January 1 through June 22, 2011. The company stated that it was in compliance with all covenants at June 30.
Key risks include dependence on U.S. government customers and government budgets, inventory and debt levels, competition, reliance on contract manufacturers, product acceptance and technology changes, limited radio spectrum, access to capital, and general economic conditions. The company had approximately $2.566 million of supplier purchase orders and reported no pending material legal claims as of June 30, 2011.
Management believed cash, anticipated operating cash flow, and available borrowing capacity would meet working-capital needs for the foreseeable future, but cautioned that economic conditions could restrict access to credit or additional capital. The filing states that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting.
Investor Verification Priorities
- Verify the registrant identity: the supplied filing is for RELM Wireless Corporation, not a registrant named BK Technologies Corp.
- Assess whether federal and state/local government demand recovered as anticipated after the September 30, 2011 federal fiscal year-end.
- Track gross-margin recovery and whether new-product production costs and manufacturing under-absorption declined.
- Monitor inventory levels, inventory reserves, operating cash flow, and the company’s ability to fund working capital.
- Confirm borrowing-base availability, covenant compliance, and repayment or refinancing of the revolving facility before its December 31, 2012 maturity.
- Evaluate the realizability of the $7.802 million deferred tax assets and potential increases to the $2.154 million valuation allowance.
- Review subsequent filings for changes in government-customer concentration, purchase orders, product launches, and additional capital requirements.