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Exhibit 99.1
Transcript of
BK Technologies Corp
First Quarter 2020 Earnings Call
May 14, 2020
Participants
Tim
Vitou – President
Bill
Kelly – Chief Financial Officer
Presentation
Operator
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. All participants have been
placed in a listen-only mode. Following management’s remarks,
the call will be opened to questions.
Before
turning the call over to Mr. Vitou for opening remarks, I will
provide the following Safe Harbor statement. Statements made during
this conference call that 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, 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.
Tim Vitou – President
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 looked 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.
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Our
sales for the first quarter totaled approximately $10.9 million,
improving 42.5% 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 US 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 have experienced some delays
and increased freight costs, we have 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 costs related to COVID-19 and reduced
factory throughput, as 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 BKR Series, the BKR
5000, is anticipated later this quarter. Meanwhile, our engineering
team is also busy implementing design upgrades for the multi-band
radio, which is projected for introduction going into next year.
These upgrades have 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.
Re-emphasizing 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 & 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 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 and speak to 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 flat-lined 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.
This 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 29.4%.
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 to 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 position 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 the first quarter 2020,
before I return for some closing thoughts.
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Bill Kelly – Chief Financial Officer
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 toward lower-margin products. For the first
quarter 2020, selling, general & 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 attributable 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
13th.
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, 2020, 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 would
now like to turn the call back over to Tim.
Tim Vitou – President
The
current environment is challenging as the pandemic evolves and
economies worldwide start to 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.
Operator
We’ll go to
Ed Shultise [ph].
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Q: 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 that you
normally produced in the first quarter. I’m looking at your
inventory, your total inventory compared to March of last
year— 10.9 million, down from 12 million last year and your
finished goods is 2.6 million, down from 3.6 million last year. 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’d mentioned at
the BKR 5000 later this quarter, that you wanted to reduce some of
the older inventory?
Bill Kelly – Chief Financial Officer
That’s
definitely the case, Ed. We’re approaching the end of the
life for the KNG products. KNG2 will go on for a bit of time, but
we are winding up the KNG product line. Actually, some of the
reduction also is in 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 age product lines and move towards our BKR
series.
Q: 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 31st it was 2.6 million
on finished goods— obviously, you had the press release
earlier this month that you reduced your head count by 18%. Will
the company have any problems with the ability to ramp up
production for the second quarter to meet sales
demand?
Bill Kelly – Chief Financial Officer
No, we
don’t believe so, Ed.
Tim Vitou – President
Randy
Willis, our Chief Operating Officer, has stalled several new
processes within our inventory control and with our lean process,
we find that we’re far more efficient in the manufacture
process and 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 product. 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.
Q: 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 10Q, 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 the way, I
guess, it— 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?
Bill Kelly – Chief Financial Officer
With
that 50% [indiscernible], we would have to consolidate anyway, Ed.
We’ve been treating it as a variable interest entity and
consolidating it anyway. So, no. I don’t anticipate that
changing.
Q: Then on the workforce reduction, is
that something considered more of a temporary or permanent
reduction? Would you expect that once we’ve passed the main
part of this COVID-19 that we would see some of those employees
reinstated?
Tim Vitou – President
What
the biggest emphasis we placed on that action, Ed, was basically
right-sizing the company for the size 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 drawing 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 for the level of business we’re running to make us as
efficient as possible right now.
4
Q: 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?
Bill Kelly – Chief Financial Officer
No, as
we introduce 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.
Q: Then just one other question here.
You brought up that 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.
Tim Vitou – President
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. That’s what’s real exciting for
this particular product launch. So, we’re very much looking
forward to it.
Operator
With no
other questions holding, I’ll turn the conference back to
management for any additional or closing comments.
Tim Vitou – President
Thank
you all for participating in today’s call. We look forward to
talking with you again when we report our second 2020 results in
August of 2020.
All the
best to all of you and have a great day.
Operator
That
will conclude today’s conference. We thank you for your
participation. You may disconnect at this time and have a great
day.
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