Good morning, ladies and gentlemen, and welcome to the RELM Wireless Corporation’s First Quarter 2013 Conference Call. This call is being recorded. At this time, all participants have been placed in a listen-only mode. Following management’s formal remarks, the call will be opened to questions.
Before turning the call over to Mr. Storey for opening remarks, I would like to remind you that statements made during this conference call that are not based on historical facts and are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and 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. 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 RELM’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC. Additional factors and risks maybe described from time to time in the company’s subsequent filings with the SEC.
We refer you to these sources for additional information. I would also like to point out that remarks made during this conference call are based on the information and understandings that are believed to be accurate as of today, May 9, 2013. RELM does not undertake any duty to update any forward-looking statements. This call is the property of RELM Wireless Corporation. Any distribution, transmission, broadcast or re-broadcast of this call in any form without the expressed written consent of the company is prohibited.
A replay of this call will be available one hour after the conference call through Friday, May 17, 2013. To access the replay, dial 877-344-7529 or 412-317-0088 for international callers and enter the code 10028016 or visit RELM’s website. Thereafter the call will be archived on RELM’s website.
In addition, if you would like a copy of the company’s press release announcing its first quarter 2013 financial and operating results, please contact RELM Wireless at 321-984-1414.
I will now turn the call over to Mr. David Storey, President and CEO of RELM Wireless Corporation. Mr. Storey, you may begin.
Thank you, Ashley, and welcome to the RELM Wireless conference call for the first quarter ended March 31, 2013. We are pleased to have you join us for today's call. Those of you who have been with us for a number of years know that historically the first quarter can be a challenging one for RELM.
Well, this year I am happy to report our financial and operating results for the first quarter were strong. Our sales improved by 62% and our earnings improved by $0.06 when compared to our first quarter of 2012. In fact, this is our best first quarter performance since 2006.
Our revenue success was fuelled by sales of our APCO P25 digital product line, the legacy D-Series and the expansive new feature rich KNG line of products that deliver solutions in all of the major frequency bands. This success in digital sales comprised 68% of total sales versus 50% for last year's first quarter.
With increased digital revenues comes marked improvement in gross margins. Our digital margins are north of 50 points. So the result is, first quarter gross margin performance of 45.7%, 7.5% better than the 38.2% gross margins experienced in the first quarter of last year. The KNG line with its expanded reach to a more diverse market segment of frequencies, represented over 50% of our revenue success supporting our state and local wins, while our legacy product line, along with the KNG line were the products of choice requested by the USDA Forest Service orders, which we announced on March 19, totalling $2.4 million.
These wins continue to validate RELM's commitment and investment in mission-critical APCO P25 digital interoperable Land Mobile Radio equipment through its D-Series and KNG line of products.
Although selling, general and administrative expenses increased in total dollar terms driven by sales incentive related expenses, as a percentage of sales, SG&A expenses declined to 38.7% from 53.6% when compared to last year's first quarter. All these factors contributed to a solid operating profit of almost a $0.5 million, a tremendous turnaround from the $678,000 loss for last year's first quarter.
Our already strong balance sheet got stronger in the first quarter with cash and trade receivables approaching $10 million, up from $8.6 million at the end of 2012. Another significant achievement during the first quarter was the successful completion of interoperability testing on Cassidian infrastructure.
RELM has now demonstrated interoperability through its KNG line of products on the infrastructure systems of five primary providers, which includes the market leader. This further enhances our ability to sell radios and capture market share regardless of the infrastructure that is deployed by the customer. Because of this, our addressable market has grown to $2.1 billion and the KNG line with its powerful value proposition is our vehicle to capture a greater percentage of that market.
On March 8, RELM announced the stock repurchase program. With the price of the company shares hovering near or below book value over the past several quarters, we believe that such a program may enhance value -- shareholder value. As described in the related press release, the program authorises the repurchase of up to $2.5 million of RELM common stock through the remainder of 2013.
The amount and timing of repurchases is not assured and it’s subject to market conditions, share price and other factors. Also the program maybe suspended, modified or terminated at any time. Today, no repurchase transactions have been consummated but rest assured that this program is a major topic of our Board of Directors’ meetings.
The results of the first quarter are encouraging and our pipeline of sales prospects is robust. As we all know, economic conditions particularly sequestration and federal spending cutbacks make for an uncertain business environment. During the first quarter, we have already seen some potential sales transactions discontinued or delayed due to funding issues.
Fortunately, RELM has a variety of advantages working in its favor to offset such reductions; more products, technology and capabilities, and more frequencies have greatly expanded our addressable market. Consequently, I believe we can achieve profitable growth even in the phase of generally adverse conditions.
This concludes my overview this morning, and I would now like to turn the call over to our Chief Financial Officer, Bill Kelly, who will review the results of the first quarter ended March 31st, 2013. Afterwards, I will make some closing remarks and address your questions. Bill?
Thank you, Dave. Our financial and operating results for the first quarter ended March 31st, 2013 are as follows. Net sales for the first quarter 2013 increased 61.9% to approximately $7.1 million, compared with $4.4 million for the first quarter in 2012. Sales of P25 digital products for the quarter more than doubled, increasing 119.7% to approximately $4.8 million compared with $2.2 million for the first quarter last year.
The increase in total sales was attributed primarily to our P25 digital products, both legacy and KNG models. Substantial orders for the legacy products from USDA Forest Service were supplemented by orders for KNG products from new customers and state and local public safety agencies.
Our gross profit margin in the first quarter of 2013 increased over seven percentage points to 45.7% of sales, compared with 38.2% of sales in the first quarter 2012. For the first quarter cost of products and corresponding gross profit margins reflected a favourable mix of product sales weighted toward P25 digital products. Also sales growth drove increased manufacturing volumes allowing us to more fully utilize and absorb our base of manufacturing and support expenses.
For the first quarter 2013, SG&A expenses totalled approximately $2.7 million or 38.7% of sales compared with $2.3 million or 53.6% of sales last year. Engineering and product development costs for the first quarter totalled approximately $912,000 or 12.9% of sales compared with $846,000 or 19.4% of sales for the first quarter last year. The comparative increase was primarily due to amortization of capitalized software and compensation-related expenses.
Marketing and selling expenses for the first quarter 2013 totalled approximately $1 million or 14.6% of sales compared with $857,000 or 19.6% of sales for the first quarter last year. The increase relates primarily to sales commissions and incentives, which directly correlate with the growth in sales.
General and administrative expenses for the first quarter 2013 totalled approximately $785,000 or 11.1% of sales compared with $637,000 or 14.6% of sales for the first quarter last year. The increase was primarily the result of headquarters, public company and compensation-related expenses.
Pre-tax income for the first quarter increased by approximately $1.2 million to $479,000 compared with a pretax loss of $678,000 for the first quarter last year. The improvement in pretax income for the quarter reflects increased sales and lower product costs.
For the first quarter, we recognized income tax expense of approximately $74,000 compared with an income tax benefit of $277,000 for the first quarter in 2012. Our income tax expense and benefit is primarily non-cash. For the first quarter 2013, net income improved to approximately $405,000 or $0.03 per diluted share compared with a loss of $401,000 or $0.03 per share for the first quarter of the prior year, a quarter-over-quarter increase of $0.6 per share.
As of March 31st, 2013, working capital totalled $24.2 million, of which $9.5 million was comprised of cash and trade receivables. This compares with working capital of $23.6 million and $8.6 million in cash and trade receivables at the end of 2012. As of March 31st, 2013, there were no borrowings outstanding under our revolving credit facility.
I would now like to turn the call back over to Dave.
Thank you, Bill. In the past, you’ve heard me mention our wonderful run of 15 consecutive quarters of profitability. And I then believed we are at the start of another run. Well, with this profitable first quarter, we now have our fourth consecutive quarter of profitability.
As nice as that is, the potential for coming quarters is more exciting. Our team is currently hard at work to turn the potential into reality and obtain the success we all believe RELM is capable of. We will now move to the question-and-answer portion of today’s conference call. I’d like to remind everyone that the company does not provide financial and operating guidance on a quarterly or annual basis and accordingly, we will not address questions in that regard.
Ashley, we are now ready to open the floor for questions.
(Operator Instructions) And our first question comes from Sam Bergman of Bayberry Asset Management. Please go ahead.
Sam Bergman - Bayberry Asset Management
Good morning, David and Bill. Very, very nice quarter.
Thank you, Sam.
Sam Bergman - Bayberry Asset Management
Couple questions. You did mention on the press release about the funnel being pretty robust. Can you give us a little more clarity on U.S. funnel and International funnel and maybe projects that you’re bidding on that you can talk about, if possible?
Well, let me touch on a couple of activities that were going on without giving too much information. As with sales team, we’ve continued to expand it actually. We’ve hired a new individual in the Central Southwest, which we’re excited about his prospects, helping us with our initiatives down there, that’s in the -- really Texas has the center piece of that region.
And we’ve also hired an [assist] person to our compliance and trucking initiatives who is ex-military and he comes with some insight information on how maybe to do a better job penetrating the three big initiatives there and they would be base radio, SPAWAR and air-force base. We’ve had some wins there and we want to capitalize on that and we believe we have an individual on the team now who can help us blueprint that better because that remains a rich opportunity.
Obviously, RELM is greatly affected by the federal spending because 65%, 80% of our revenues are driven from that side of the market. We are expanding in the state and local and the win that we announced in the first quarter, a part of that was state and local, which was all addressed by our KNG line of products and we couldn’t have addressed it without that. We needed that feature-rich compliance and our value proposition stitch the needs of those customers.
We see more and more of that. Those wins especially starting with Harris County have continued to help us expand our reach and build a portfolio of success. We see additional opportunity in California where we've always been strong. We created a specific solution for the California Department of Forestry, we responded to them. We've had some wins in some counties out there, even though they are financially strapped with accounting fire season and it’s going to be you know a very, very harsh fire season heading our way. There is potential there too.
So -- and then we have -- we have a brand -- we have additional sales people in the Midwest and of course we've had the success in the Northeast. We are starting to have some nice success there, starting with the Lancaster County, Pennsylvania opportunity, which again contributed bookings-wise to our first quarter.
So very active, the nice thing about that funnel that I can say is that it's more balanced. Same as far -- usually it was very greatly weighted to federal opportunities. As I mentioned, there had been some slippages to the sequestration, but -- and some of them have just shifted out and we believe they will be funded and we are working on some right now.
But I want to -- I don’t what to lay out exactly who and what they are because this is recorded and we don’t want to lay out, [apart from or] any type of competition. I’m sure competitions [will happen], but we don’t want to expose our activities there, but the message is when I look at the second quarter, last year second quarter was a great second quarter, our plan is to better that. We want to do better than that and so we are striving for and that we feel really good coming out of the first quarter.
As you know the KNG line with its broader number of products and its technology, which we continue to add to just give us more creditability in the marketplace and then when you add the value that we offer these customers, they can buy a lot more of our radios than the competition and the fact that we build the product right here in United States, I think all plays well for our business plan for 2013.
Sam Bergman - Bayberry Asset Management
And can you talk a little bit about international at this time?
Well. I can. We as you know, we've had a couple conversion, but there are 85 other countries out there that have adopted the APCO P25 stranded in one form or another. We have active initiatives in around seven of these countries right now and I tend to put these in a lower probability category. We try to attack that market through developing an in-country partner that has the connections in that country to deliver the goods.
Again the good news is this market was unreachable for us with our legacy product line the D-Series and now with the trunking technology that we own in our products and the KNG line, in fact at recent show, the recent IWCE show in Vegas, we had a lot more people coming to our booth, we had lot of meetings with people from these countries and they -- there was a lot of positive conversions, but nothing has developed yet as far as a hard win, but I believe we should have the opportunity to win some of that business hopefully in this quarter. So we are working hard to do that, but I really don’t have anything to report there, but there are seven countries that we currently have active bids out there.
Sam Bergman - Bayberry Asset Management
Okay. Thank you, David. Thank you.
This concludes our question-and-answer session. I would now like to turn the conference back over to David Storey for any closing remark.
Thank you. Ashley. And I would like to thank everyone for participating in today’s call. We look forward to visiting with you again when we report our second quarter results in August of 2013. Good bye and have a good day.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
Thank you, Ashley.
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