Exhibit 99.1
Transcript
of
BK
Technologies Corp
Third
Quarter 2020 Financial Results
November
12, 2020
Participants
Timothy
Vitou - President
William
Kelly - Executive Vice President, Chief Financial Officer &
Secretary
Analysts
Presentation
Operator
Good
morning, ladies and gentlemen, and welcome to BK Technologies
Corporation Conference Call for the third quarter and 9 months
ending September 30, 2020. This call is being recorded. (Operator
Instructions) Before turning the call over for Mr. Vitou for
opening remarks, I will provide the following safe harbor
statement.
Statements
made during this conference today are not based on historical facts
and are forward-looking statements. These statements are subject to
known and unknown factors and risks. 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 such
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, 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,
the floor is yours, sir.
Timothy Vitou - President
Thank
you, Jim, and thanks, everyone, for joining today. I'll arrange my
comments as follows: first, I'll highlight our financial results;
second, I'll spend some time providing operational updates; and
third, I'll turn the call back over to Bill to dive deeper into our
financial results before opening up for some Q&A.
So
first up, the financial results. Q3 revenue of $12.8 million grew
8%. Operating income of $1 million increased 253% and operating
margins of 8.17% more than tripled. These third quarter results
illustrate the earnings power of our new expense structure. We're
committed to leveraging that expense structure and driving profits
with revenue growth which we can achieve in at least 3 ways: one,
increased sales of existing products; two, growing sales of our BKR
5000 launched 90 days ago in August; and three, with the launch of
the multiband BKR 9000 in the first half of next year. We had
success in each of those growth initiatives during the quarter and
after quarter end. Beginning with our first growth initiative,
increasing sales of existing products, we won a contract for up to
$4.2 million from an electric utility agency of the U.S. Department
of Energy, or the DOE.
The
contract was for BK's KNG2 Digital P-25 portable and mobile radios
with related accessories, which will be deployed at more than 35
sites in the U.S. The contract covers a period of 1 year, which
commenced in June 2020 and expires in June 2021.
Shortly
after awarding the contract, the DOE issued firm purchase orders
for equipment totaling approximately $3.1 million. We like this
vertical as the utilities and energy market segment are an
important part of our strategic plans to increase BK's overall
market share. Accordingly, a significant contract from an agency of
the DOE is encouraging.
This
important new customer selected BK as a sole source for this
contract over several competitors based on a comprehensive
evaluation of performance, functionality and price. We're excited
to welcome this agency and to support their mission with
world-class products and services.
Continuing
with existing products, we also won an order totaling approximately
$1.1 million from the National Interagency Fire Center, or NIFC.
The order was for BK's KNG2 portable radios with related
accessories.
As we
have been for so many years, we're proud to support NIFC in the
professional wildland firefighting community. They have relied upon
our products and wildland fire suppression efforts for over 2
decades. First, deploying the E Series and G Series analog radios,
then our P-25 D Series radios and more recently, migrating to our
P-25 KNG2 digital radios. Our extended track record of
dependability in harsh and life-threatening conditions has clearly
earned NIFC's confidence as demonstrated by that recent
order.
After
quarter end, our momentum for sales of existing products continued
with an order totaling approximately $1.5 million for public
service agency of the U.S. Department of Interior, or
DOI.
The
order was for BK's KNG2 portable radios and mobile radios with
related accessories. This order was anticipated to be fulfilled
during the fourth quarter of 2020.
We are
pleased to continue our long-standing support of the DOI, which
spans more than 25 years. Such an extended relationship, combined
with this order, is a clear demonstration of their confidence in
us. We are looking forward to cultivating similar long-term
relationships for many years to come.
Moving
on to our next growth initiative, launching and increasing sales
from new products on August 31, we announced the market
introduction of the BKR 5000 portable radio, the first model in the
new BKR series of P-25 LMR products and solutions.
The BKR
5000 offers an array of programmable functionality to help first
responders get the most out of their tactical communications. The
BKR 5000 comes in 3 tiers allowing maximum flexibility and
customization for the radio users mission-critical needs and has
been designed to meet the requirements of today's tough public
safety communications environment.
The BKR
5000 was designed and developed by our engineering team with
extensive input from customers to incorporate the features and
options needed by first responders, including Bluetooth, GPS and
BK's long popular cloning capability.
The new
form factor includes a top display, large control buttons for use
with heavy gloves and an IP68 ruggedized housing, which comes in
both black and optic yellow.
The new
intuitive user interface maintains the same ease of use
characteristics that have been customer proven and well accepted in
the current BK products, software and programming editors. Which
further allows for an easy transition from current embedded
products to the new BKR series.
A full
line of accessories is available, including intelligent battery and
charging solutions, IP68 remote speaker microphones and the
ever-popular BK wildland fire alkaline battery
clamshell.
The new
BKR 5000 is expected to be a platform that enhances BK's ability to
address significant new vertical markets, leading to extended
growth and market share. After quarter end, we were pleased to
announce our first significant order for the BKR 5000 and related
accessories.
The
order totaled approximately $1.1 million from a State of Tennessee
agency and is anticipated to be fulfilled during the fourth quarter
of 2020. We're excited about this order because it came within 1
month after launch. Additionally, this Tennessee State agency is a
first-time BK customer.
The BKR
5000 is just the initial model in a comprehensive new line of
radios, which will include multiband products next year. Securing
such a substantial order from a new customer shortly after a new
product launch was very promising, and we look forward to
capitalizing on our early momentum.
Speaking
of multiband products, that brings us to our next growth
initiative, launching our first multiband product, the BKR 9000.
During the third quarter, we continued to make headways toward the
launch of the BKR 9000, which is expected to be in the first half
of 2020. The BKR 9000 addresses additional markets at a
significantly higher price point with exponentially larger contract
opportunities. We believe it will open new vertical markets and
customers and be what fuels our growth in the next several
years.
To take
a bit of a step back, there's an approximate $2 billion addressable
market for LMR. We see a huge opportunity for both organic and
exponential growth with the release of the new BKR Series products.
In particular, the 5000 and 9000 opened the approximate $1 billion
structure fire and law enforcement verticals that up until now BK
has had limited access to.
Given
the current environment of weather extremes, social unrest and the
global pandemic, the importance of public safety is heightened.
We're confident our new products and focus will allow us to capture
additional market share quickly. We look forward to updating you on
the sales of the BKR 5000 and the progress of the BKR 9000 in the
quarters ahead.
And
while we're excited about the future, I'd like to reiterate, the
present is bright. Third quarter performance of 8% revenue growth,
253% operating income growth and the tripling of operating margins
was achieved from existing products, the new expense structure and
with the BKR 5000 only introduced midway through the
quarter.
Our
existing, newly launched and future growth engines allow us to
create substantial short-term and long-term shareholder value as
these third quarter results demonstrate.
This
concludes my overview. I'll now turn the call over to Bill Kelly,
our Chief Financial Officer, who will review the financial and
operating highlights.
William Kelly - Executive Vice President, Chief Financial Officer
& Secretary
Thank
you, Tim. Following is a summary of our financial and operating
results for the third quarter and 9 months ended September 30,
2020.
Net
sales for the third quarter of 2020 increased 8.1% to approximately
$12.8 million compared with approximately $11.8 million for the
third quarter last year. For the 9 months ended September 30, 2020,
net sales increased 2.6% to approximately $33.6 million compared
with $32.7 million for the 9-month period last year.
Gross
profit margins as a percentage of sales for the third quarter ended
September 30, 2020, were approximately 40.8% compared with 43.3%
for the same quarter last year.
For the
9-month period ended September 30, 2020, gross profit margins were
approximately 40% compared with 40.4% for the same period last
year. Our cost of products and gross profit margins are derived
from material, labor and overhead costs, product mix, manufacturing
volumes and pricing.
Gross
profit margins for the third quarter of 2020 decreased compared
with the same period last year, primarily due to a less favorable
mix of product sales.
For the
9 months ended September 30, 2020, gross profit margins decreased
slightly compared with the 9-month period last year, having been
impacted primarily by the first quarter during which more customer
orders were fulfilled with on-hand inventory in concert with our
inventory reduction program, resulting in lower manufacturing
volumes and suboptimal utilization and absorption of manufacturing
and support expenses.
Earlier
this year, we reduced manufacturing operations employment by
approximately 21% as well as other related expenses. These
reductions, combined with increasing sales, have improved our
utilization and absorption of manufacturing and support
expenses.
SG&A
expenses for the third quarter ended September 30, 2020, decreased
by $653,000 or 13.6% to approximately $4.2 million, which was 32.6%
of sales. This compares with approximately $4.8 million or 40.8% of
sales for the same quarter last year.
For the
9 months ended September 30, SG&A expenses decreased by $2
million or 13% to approximately $13.3 million, which was 39.5% of
sales. This compares with approximately $15.2 million or 46.6% of
sales for the 9-month period last year.
Consistent
with employment and expense reductions in our manufacturing
operations, earlier in the year, we reduced SG&A employment by
approximately 15% as well as other expenses in sales, go to market,
engineering and headquarters. For the third quarter of 2020, we
recognized other expenses totaling approximately $362,000, related
primarily to an unrealized loss on our investment in 1347 Property
Insurance Holdings. During last year's third quarter, we recognized
net other expenses totaling approximately $310,000.
For the
9 months ended September 30, 2020, net other expenses totaled
approximately $945,000, primarily from an unrealized loss of 1347
PIH. For the same period last year, we recognized net other income
of approximately $222,000, primarily from unrealized gains on 1347
PIH and interest income.
For the
third quarter of 2020, net income increased almost 185% to
approximately $678,000 or $0.05 per diluted share compared with
$238,000 or $0.02 per diluted share for the third quarter last
year.
For the
9 months ended September 30, 2020, our net loss narrowed to
approximately $817,000 or $0.07 per diluted share compared with
approximately $1.3 million or $0.10 per diluted share for the same
period last year.
For the
first 9 months of 2020, we reduced inventory by over 37% or $5.1
million, and generated approximately $1.7 million of positive cash
flow, increasing our cash balance by 36%. Our capital return
program has paid 18 consecutive quarterly dividends with the last
one paid on October 20, 2020.
That
concludes my remarks. We will now move on to the
question-and-answer portion of the conference call. I would like to
remind everyone that we do not provide financial and operating
guidance on a quarterly or annual basis. Jim, we're now ready to
open the floor for questions.
Operator
[Operator
Instructions]. And we'll take our first question today from Mr. Ed
Schulz [ph].
Q: Okay. Congratulations on the good quarter there and for
taking my questions. The first question I have is on the COVID
pandemic and its effect on your sales. Historically, clients in
California have been among the longest clients, and California has
had more restrictive shutdowns than the rest of the country. Can
you comment on the ability of your sales force to have constructive
dialogue with these clients? And have you seen any indication that
orders may have been delayed or possibly moved forward to forward
quarters?
Timothy Vitou - President
Ed,
thank you for the question. This is Tim. COVID has had a couple of
different effects on the sales organization. We have been severely
limited in our ability to actually go out and meet face-to-face
with customers. Where that typically has the most effect is on new
customers when you're trying to build a relationship. As you know,
a lot of our customer -- or a lot of our sales is based on
long-term existing relationships, and we've been able to kind of
pivot very successfully to online Zoom calls and meeting virtually
as opposed to face-to-face.
So with
regard to existing customers, it hasn't really affected us too
much. We have seen COVID have an effect on some budgets at some
county levels out on the West Coast, where they have delayed a
purchase by 1 quarter or 2, something along those lines. But here
again, I think what's happening, Ed, is that people are learning
how to do things differently. You're finding there is no COVID
handbook. So people are kind of walking through new processes, new
procedures to continue doing business. One of the things I'd like
to remind the team and the team constantly reminds me, radios are
one of those products that may be -- since it's going to support
public safety, first responders, there's still a critical
need.
All
throughout COVID, we continued to manufacture, we continued to work
as we're considered an essential business to supply these tactical
comms to our public safety customers. I think that going forward,
when it comes to the new accounts, we were very excited to announce
the agency in Tennessee. That was done through a very talented
sales individual virtually.
We were
able to send them product. They put it through the paces. We were
doing a lot of Zoom calls with their technology experts, testing
the gear. So it was -- the complication of the sale was magnified,
but the sales team was able to pull it off. So I'm very proud of
their efforts.
Q: Okay. And the next question I have is on R&D. Last
year, this quarter, it was about $2.4 million, that's come down to
about $2 million. And I guess so far this year, we've averaged
about $2 million a quarter. Is that the type of number that we
should expect going forward, about $2 million per
quarter?
William Kelly - Executive Vice President, Chief Financial Officer
& Secretary
This is
Bill. It should be about that level. We're working through our
business plan next year. We -- if you look at last year and the
first couple of quarters of this year, we have had engineering
trend down a bit because we've been using fewer external resources.
So I would expect that to continue. We are relying now almost
exclusively on our internal team. We will probably expand that team
and its capabilities a bit next year, but I don't expect to see any
ramp-up in R&D because of that.
Q: Okay. And then the last question I have is on your
inventories. Obviously, you brought that down quite a bit from $13
million down to about $8 million. Is that the type of level that we
should expect going forward? Or would you expect maybe some rebound
getting back up toward that $10 million level?
William Kelly - Executive Vice President, Chief Financial Officer
& Secretary
No. Our
goal is to keep it at those levels, Ed. We've -- it's been a
difficult but very successful reduction program. That's been one of
the company's biggest challenges for years, and the guys in the
company have done a nice job of bringing it down. And our intent is
to stay there. And as the product line continues to be more
modernized and the KN -- or the BKR product line expands with new
products and the KNG eventually goes away, we could stand to --
because of the new componentry and the processes that have been
implemented, it's possible that we could bring it lower. But during
the course of next year, I would expect to stay at about these
levels.
Q: Okay. Very good. Okay. That's all I have, and
congratulations on the launch of the BKR 5000.
Timothy Vitou - President
Thank
you, Ed.
William Kelly - Executive Vice President, Chief Financial Officer
& Secretary
Thanks,
Ed.
Operator
And Mr.
Kelly, Mr. Vitou, we have no further questions from our audience at
this time. I'll turn it back to our leadership team for any
additional or closing remarks.
Timothy Vitou - President
Thank
you, Jim, and thank you all for participating in today's call. We
look forward to talking with you again when we report our Q4 and
full year 2020 results in March of 2021. All the best to all of
you, and have a great day today.