Q1 2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to BK Technologies Corporation Conference call for the first quarter ended March 31st 2020. This call is being recorded all participants have been placed in listen only mode and following management's remarks. The car will be opened two question.

Before turning the conference over to Mr. Ritu for opening remarks, I will provide the following safe Harbor statement.

Statements made during this conference call are not based on historical facts and our forward looking statements.

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 such material differences have been describes in yesterday's press release and it became.

Linked with the FCC.

These statements are based on information and understandings that are believed to be accurate as of today may 14 to 2020, and we do not undertake any duty to update forward looking statement.

I will now turn the call over to Mr., Timothy but you president of BK technologies.

But you you may begin.

Thank you Jess.

Hey, 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 started this year brought cobot 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 whether 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 and trade shows another business functions.

As an essential business supporting first responders BK has remained open an 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 is 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 approving 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.

Well, we've experienced some delays in 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 any immediately preceding quarter.

We are however below our typical gross profit margin levels, reflecting the impact of higher freight costs related to covert 19 and reduced factory throughput.

It's more customer orders were fulfilled from on hand inventory.

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 BK our series the BK. Our 5000 is anticipated later this quarter.

Meanwhile, or engineering team is also busy implementing design upgrades for the multi band 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.

Do you want 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 financial operating results.

Reemphasizing My earlier comments, we have significantly reduced our expense structure companywide.

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 non workforce 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 November 2019 high of over 15 million.

A 28% reduction.

And by two and a half 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 speak that some of the positive strides we have made since the company 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 flat line at approximately $25 million to $29 million.

During the past four years, however, our annual sales of averaged approximately 45 million, 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 four 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 upgraded 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 we should ultimately drive sales growth.

Beyond our core business operations, we have put available capital work with investments and 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 provides 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.

Thanks, Tim.

Following as a summary of our financial and operating results for the first quarter ended March 31st 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.

Improve 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 Kobe of 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 2.3% to approximately $4.7 million compared with $4.8 million for last year's first quarter.

The decline in SGN, a expenses was attributed primarily to new product development.

For the first quarter of 2020, we recognized net other expense of approximately $344000.

Related primarily to an unrealized loss on our investment in 13 47 property insurance holdings.

During last year's first quarter, we recognized net other income of approximately $645000 also primarily related to our investment in 13 47 PIH.

For the first quarter 2020, we reported a net loss of approximately $1.2 million or nine cents per diluted share compared with $1.3 million or 10 cents 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 1.4 or 5 million shares since the program's inception.

We.

For teens 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 BPP, we met the established qualifications to receive the funds.

On April 23rd of 2020, the SB a issued new guidance that created uncertainty regarding the qualification requirements for PPP loan.

Therefore on April 24 out of an abundance of caution.

Our board determined to repay the alone and we initiated repayment of the full amount of alone to chase.

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

The current environment is indeed challenging as the pandemic evolves in the economy's worldwide start to reconsider or 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're in a good position to succeed in coming quarters.

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

Thank you ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time.

If you're using a speaker phone, we ask that while posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do you have a question or comment. Please press star one on your telephone keypad at this time.

Please hold while we poll for questions.

And we'll go to Ed Shelton Your line is open Sir.

Yes, good morning, Tim and Bill had a very going ahead there.

Okay all right.

Good morning question for you on the.

You indicated in the call that a your gross margins were down a bit because the manufacturing costs weren't spread out over the number of products you'd normally produced in the first quarter.

I'm looking at the your inventory your total inventory compared to a March of last year I'm, just a 10.9 million down from 12 million last year and you're finished goods is that 2.6 million down from 3.6 million last year.

A couple of questions I have on that the first one is you is part of the inventory reduction by design because you expect to have.

New product lines as you'd mentioned that the BK. Our 5000 later this quarter that you wanted to reduce some of the older inventory.

That's definitely the carries a this is Phil you know we're approaching the end of life for the KMG products KMG two will go on for a bit of time, but we are winding up.

Okay, and Gi product line and a actually some of 'em. Some of the reduction also is in the even older product line that we called the D series. So yes. Some of the reduction is happening as we as we get out of the more age product lines and move towards our BK our CFO.

Yes.

Okay and then the second part of my question is typically the first in the fourth quarters of the year.

Sure with low sales quarters, and the second and third quarter are typically a three or 4 million higher than the first and fourth quarters considering that your inventories is so low at this point are good at March 31st It was 2.6 million on finished goods.

Well and.

Obviously you had the.

Press release earlier this month that a that you reduce your head count by 18%, Yeah, well the company have any problems with the ability to ramp up production for the second quarter to meet that meet sales staff.

No. We don't believe so add to Tim was Gonna say, Ed This Tim Randy Willis, our Chief operating officer his insights.

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 low.

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 to 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 is working very well or no.

Okay very good.

And then a a question for you on our investment a in that 30 and 47 PIH.

I noticed it I guess this last quarter, we had a loss of 300000, but when I was looking at the 10-Q. They indicated that a fundamental now owns I guess more than 50% I think it was 50.1% about 13 47, PIH what might have any change on the way that this is accounted for <unk> currently.

Well I guess it.

We just mark to market at the end of each quarter and put on the balance sheet, a gain or loss, depending on where the price was compared to previous quarter now that they've gone above 50% will that change how that's accounted for.

Oh, yes.

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

Okay, and then on the the workforce reduction or is that helping the considered more of a a temporary or permanent reduction.

Would you expect at once that we passed the main part of this cobot 19 that we would see a some of those employees reinstated.

Looked at what the biggest a 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 permanent we just thought it was the right time to right size. The company the level of business, we're running to make us as efficient as possible right now.

Okay. Thank you and then that at the last question I have.

He is on the refresh that product line.

R&D for the last quarter has been about a $2 million is that something that we should.

ER budget for the rest of the year approximately 2 million a quarter is that something that we would expect.

Hi. This is bill now is we we introduced the first product a this quarter I'm anticipating that we will be seeing a reduction in.

Yeah in R&D expenses, probably somewhat in the second quarter and.

And then a bit more in the third and fourth quarters.

Okay tremendous.

Okay and then just one other question here you brought up the B.K., our 5000 expect to introduce this quarter well.

I had to say 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 it's going to bring in.

Additional sales in the future.

Thanks for the question. It is 10 as great question.

The.

BK, our 5000 in essence as a single band radio.

It will be a.

A real charger for us in some markets that we really haven't been able to attack.

Very effectively with the can G series. So there's radio basically will take the place of the kanji, 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 BK. Our 5000. So we have a group of embedded customers that have the can Gi and we're already working with customers on lifecycle replacement of.

The current year with this mid KMG with this new BK, our 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.

And what sounds very good well. Thank you very much that's all the questions I have.

Thanks, Ed have a great warning.

You too.

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

Thank you Jess and thank you all for participating in today's call. We look forward to talk with you again, when we report our second quarter results in August of 2020.

All the best to all of you and have great day.

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

Okay. Thanks, Jeff.

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