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Edited Transcript of BKTI.A earnings conference call or presentation 14-May-20 1:00pm GMT

Q1 2020 BK Technologies Corp Earnings Call

Jun 16, 2020 (Thomson StreetEvents) -- Edited Transcript of BK Technologies Corp earnings conference call or presentation Thursday, May 14, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Timothy A. Vitou

BK Technologies Corporation - President

* William P. Kelly

BK Technologies Corporation - Executive VP, CFO & Secretary

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to BK Technologies Corporation conference call for the first quarter ended March 31, 2020. This call is being recorded. (Operator Instructions) Before turning the conference over to Mr. Vitou for opening remarks, I will provide the following safe harbor statements.

Statements made during this conference call are not based on historical facts and are forward-looking statements. These statements are subject to known and unknown risks and factors. The company's actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements. And some of the factors and risks that could cause or contribute to material differences have been described in yesterday's press release and in BK's filings with the SEC. These statements are based on information and understandings that are believed to be accurate as of today, May 14, 2020, and we do not undertake any duty to update forward-looking statements.

I will now turn the call over to Mr. Timothy Vitou, President of BK Technologies. Mr. Vitou, you may begin.

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Timothy A. Vitou, BK Technologies Corporation - President [2]

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Thank you, Jess, and good morning, everyone. Welcome to the BK Technologies investor call for the first quarter ended March 31, 2020. I'll provide some comments about the business before Bill takes us through the financial and operating results.

The start of this year brought COVID-19 and unprecedented business conditions, fostering a high degree of uncertainty about the near-term future. With these conditions in mind, we look closely at our operations and took actions in recent weeks, reducing our expense structure to help weather the current environment and position BK to emerge as a strong company when the domestic and worldwide economies improve.

Earlier this month, we implemented an 18% reduction in our workforce, while also eliminating or suspending other expenses, including travel, participation in trade shows and other business functions. As an essential business supporting first responders, BK has remained open and operational during the pandemic. While doing so, we have implemented policies consistent with best safety practices, including social distancing and remote work from home for those on the team able to do so effectively.

Fortunately, our business has largely continued with only modest interruption or impact to date compared with some other companies and businesses. Our sales for Q1 totaled approximately $10.9 million, improving 42% compared with last year's first quarter and 48% compared with the immediately preceding quarter. Q1 2020 sales were driven primarily by orders from existing customers, including the U.S. Forest Service, several of which were previously announced during the quarter.

Regarding our manufacturing operations, some of our supply chain partners were temporarily closed for periods of time. However, all are pretty much reopened to varying degrees. While we've experienced some delays and increased freight cost, we've been able to procure the materials necessary to manufacture our products and fulfill customer orders in a timely manner.

Gross profit margins for Q1 2020 were improved from last year's first quarter and the immediately preceding quarter. They were, however, below our typical gross profit margin levels, reflecting the impact of higher freight cost related to COVID-19 and reduced factory throughput as more customer orders were fulfilled from on-hand inventories. This dynamic was part of an inventory reduction initiative, which drove a near 20% decline in inventory from the start of the year with favorable cash flow impact.

Importantly, we have been able to continue progress with our product development initiatives. The first model in our planned new BKR Series, the BKR 5000, is anticipated later this quarter. Meanwhile, our engineering team is also busy implementing design upgrades for the multiband radio, which is projected for introduction going into early next year. These upgrades have been taken additional time, but we believe they will ultimately yield a product that is best suited to compete in the marketplace.

Q1 2020 operating performance improved from last year's first quarter and from the immediately preceding quarter. Considering the uncertainty associated with the current pandemic, it is also important to mention that we have taken actions to better position the company for further improvement in financial operating results.

Reemphasizing my earlier comments, we have significantly reduced our expense structure company-wide. The primary contributor was an 18% reduction in our workforce that touched almost every group in the company from sales to manufacturing, to engineering, even general and administrative areas. Other nonworkforce-related expenses were also eliminated or suspended.

Regarding working capital and cash flow, our inventory reduction program launched late last year has been successful and effective. By the end of Q1, inventory declined by approximately $4.3 million from a November 2019 high of over $15 million, a 28% reduction, and by $2.5 million since the start of the year, a 19% reduction. This has been instrumental in generating positive operating cash flow for the first quarter.

Additionally, our stock repurchase program has been completed and was not extended, which should further contribute to positive cash flow in coming quarters.

Shifting our focus from the recently completed first quarter, I'd like to take a few minutes to speak on some of the positive strides we have made since the company, the executive management team and the Board were restructured in 2017. One of our most important objectives entering 2017 was and continues to be sales growth. For nearly a decade, our annual sales were flatlined at approximately $25 million to $29 million. During the past 4 years, however, our annual sales have averaged approximately $45 million, a 65% increase from the average of $27 million for the prior 10 years. The sales growth has been realized effectively and efficiently with selling and marketing expenses for the past 4 years averaging approximately $4.4 million versus $3.4 million for the preceding 10 years, an increase of only 29%.

Another priority was to significantly upgrade and modernize our product portfolio. Accordingly, we have made significant investments in product development in recent years, working on completely reconfiguring our product line and adding technology features and functionality. This investment, we believe, will position us in coming quarters to enter new markets and capture additional market share, which should ultimately drive sales growth.

Beyond our core business operations, we have put available capital work with investments in other companies that generated significant cash and returns. In one case, making an investment of $3 million that was liquidated for $11 million only after a couple of years. The capital generated from this investment helped fuel product development, manufacturing equipment upgrades and returns to shareholders in the form of $7.7 million in dividends and the repurchase of 1.45 million BK shares.

All these items are significant positive milestones for BK that we believe provide a solid foundation to withstand today's challenges and positions us for success moving forward. This concludes my overview this morning. I'll now turn the call over to Bill Kelly, our Chief Financial Officer, who will review the financial and operating highlights for Q1 2020 before I return for some closing thoughts. Bill?

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William P. Kelly, BK Technologies Corporation - Executive VP, CFO & Secretary [3]

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Thanks, Tim. The following is a summary of our financial and operating results for the first quarter ended March 31, 2020. Net sales for the first quarter of 2020 increased 42.5% to approximately $10.9 million compared with $7.6 million for the first quarter last year.

Gross profit margins as a percentage of sales for the first quarter of 2020 improved to approximately 35.8% compared with 31.9% for the first quarter last year. As Tim previously mentioned, gross profit margins improved quarter-over-quarter. However, they were below our typical gross profit margins, having been impacted by increased freight costs associated with COVID-19, under absorption from lower manufacturing throughput related to our inventory reduction program and a mix of sales weighted more towards lower-margin products.

For the first quarter of 2020, selling, general and administrative expenses declined 0.3% to approximately $4.7 million compared with $4.8 million for last year's first quarter. The decline in SG&A expenses was attributed primarily to new product development. For the first quarter of 2020, we recognized net other expense of approximately $344,000 related primarily to an unrealized loss on our investment in 1347 Property Insurance Holdings. During last year's first quarter, we recognized net other income of approximately $645,000, also primarily related to our investment in 1347 PIH.

For the first quarter of 2020, we reported a net loss of approximately $1.2 million or $0.09 per diluted share compared with $1.3 million or $0.10 per diluted share for the first quarter last year.

As part of our capital return program, we paid a quarterly dividend on April 13. Also, we completed our repurchase program in early April, having repurchased approximately 1.45 million shares since the program's inception.

On April 13, 2020, we received approval and funding through Chase Bank of approximately $2.2 million under the Federal Paycheck Protection Program. We intended to use the proceeds for qualifying expenses in accordance with the terms of the program. At the time we applied for the PPP, we met the established qualifications to receive the funds.

On April 23, 2020, the SBA issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan. Therefore, on April 24, out of an abundance of caution, our Board determined to repay the loan, and we initiated repayment of the full amount of the loan to Chase.

I'll now turn the call back over to Tim.

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Timothy A. Vitou, BK Technologies Corporation - President [4]

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Thanks, Bill. The current environment is indeed challenging as the pandemic evolves and the economies worldwide start to reconsider -- consider reopening. Although the near-term future is uncertain for us and many other companies, I believe BK is fundamentally strong. And with our recent cost reduction actions and impending new product introductions, we are in a good position to succeed in coming quarters.

We're going to now move on to the question-and-answer portion of the conference call. I'd like to remind everyone that we do not provide financial and operating guidance on a quarterly or annual basis. Jess, we're ready to open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to [Ed Schultes].

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Unidentified Analyst, [2]

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Question for you. On the -- you indicated in the call that your gross margins were down a bit because the manufacturing costs weren't spread out over the number of products you'd normally produce in the first quarter. I'm looking at the -- your inventory, your total inventory compared to March of last year is $10.9 million, down from $12 million last year, and your finished goods is $2.6 million, down from $3.6 million last year. And a couple of questions I have on that. The first one is, is part of the inventory reduction by design because you expect to have new product lines, as you mentioned, the BKR 5000 later this quarter that you wanted to reduce some of the older inventory?

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William P. Kelly, BK Technologies Corporation - Executive VP, CFO & Secretary [3]

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That's definitely the case, [Ed]. This is Bill. We're approaching the end of life for the KNG products. KNG 2 will go on for a bit of time. But we are winding up the KNG product line. And actually, some of the reduction also is in an even older product line that we call the D-Series. So yes, some of the reduction is happening as we get out of the more aged product lines and move towards our BKR Series.

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Unidentified Analyst, [4]

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Okay. And then the second part of my question is, typically, the first and the fourth quarters of the year are relatively low sales quarters and the second and third quarter are typically $3 million or $4 million higher than the first and fourth quarters. Considering that your inventory is so low at this point or at March 31, it was $2.6 million on finished goods. And obviously, you had the press release earlier this month that you've reduced your headcount by 18%. Will the company have any problems with the ability to ramp up production for the second quarter to meet sales demand?

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William P. Kelly, BK Technologies Corporation - Executive VP, CFO & Secretary [5]

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No, we don't believe so, [Ed], Tim was going to say something.

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Timothy A. Vitou, BK Technologies Corporation - President [6]

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[Ed], this is Tim. Randy Willis, our Chief Operating Officer, he stalled several new processes within our inventory control. And with our lean process, we find that we're far more efficient in the manufacturer process, in the inventory control process. This has been one of our initiatives for the last couple of years, is to reduce the reliance on having a lot of product on a shelf and get far more efficient in our production. So Randy and his team have put in a lot of effort to try and do exactly that, lower the inventory yet stay very nimble in order to handle any of the orders that do come in. So that is by design. And it's working very well right now.

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Unidentified Analyst, [7]

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Okay. Very good. Okay. And then a question for you on our investment in 1347 PIH. I noticed that, I guess, this last quarter, we had a loss of $300,000. But when I was looking at the 10-Q, they indicated that Fundamental now owns, I guess, more than 50%, I think it was 50.1% of 1347 PIH. Will that have any change on the way that this is accounted for? Because currently, the way, I guess, we just mark to market at the end of each quarter and put on the balance sheet a gain or a loss, depending on where the price was compared to the previous quarter. Now that they've gone above 50%, will that change how that's accounted for?

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William P. Kelly, BK Technologies Corporation - Executive VP, CFO & Secretary [8]

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With that 50% change, we would have to consolidate anyway. And we've been treating it as a variable interest entity and consolidating it anyway. So no, I don't anticipate that changing.

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Unidentified Analyst, [9]

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Okay. And then on the workforce reduction, is that something to consider more of a temporary or permanent reduction? Would you expect that once we pass the main part of this COVID-19 that we would see some of those employees reinstated?

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Timothy A. Vitou, BK Technologies Corporation - President [10]

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What the biggest emphasis we placed on that action, Ed, was basically rightsizing the company for the size of business that BK is producing right now. As business improves, as new products come to market, and if we're able to capture the market share that we believe we can, we indeed will be growing the organization back to the size to handle the level of business that we'd be running at. So we look at it as a -- I don't call it a temporary or a permanent. We just thought it was the right time to rightsize the company for the level of business we're running to make us as efficient as possible right now.

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Unidentified Analyst, [11]

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Okay. And then the last question I have is on the refreshed product line. Your R&D for the last quarter has been about $2 million. Is that something that we should budget for the rest of the year, approximately $2 million a quarter? Is that something that we would expect?

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William P. Kelly, BK Technologies Corporation - Executive VP, CFO & Secretary [12]

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Ed, this is Bill. No, as we introduced the first product this quarter, I'm anticipating that we will be seeing a reduction in R&D expenses probably somewhat in the second quarter and then a bit more in the third and fourth quarters.

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Unidentified Analyst, [13]

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Okay. Tremendous. Okay. And then just one other question here. You brought the BKR 5000 you expect to introduce this quarter. If you had to say that, that was going to replace a particular model, what would you say that's going to replace? And what additional features does this have that's going to bring in additional sales in the future?

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Timothy A. Vitou, BK Technologies Corporation - President [14]

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Thanks for the question. This is Tim. That's a great question. The BKR 5000, in essence, is a single-band radio. It will be a real charger for us in some markets that we really haven't been able to attack very effectively with the KNG-Series. So this radio basically will take the place of the KNG. But what it opens up is a couple of markets that we haven't really been able to attract a lot of action when especially things like structure fire. They want a top-level display, they want different types of buttons on the radios and a little bit additional functionality, all are being addressed with the BKR 5000. So we have a group of embedded customers that have the KNG, and we're already working with customers on life cycle replacement of the current year with this -- KNG with this new BKR 5000. But we also believe it attracts some new verticals for us, and that's what's real exciting for this particular product launch. So we're very much looking forward to it.

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Operator [15]

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And with no other questions holding, I'll turn the conference back to management for any additional or closing comments.

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Timothy A. Vitou, BK Technologies Corporation - President [16]

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Thank you, Jess, and thank you all for participating in today's call. We look forward to talking with you again when we report our second quarter results in August of 2020. All the best to all of you, and have a great day.

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Operator [17]

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Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time, and have a great day.