RELM Wireless Corporation (NYSEMKT:RWC)
Q3 2013 Earnings Call
November 14, 2013 9:00 AM ET
David Storey – President and CEO
Bill Kelly – EVP and CFO
Sam Bergman – Bayberry Asset Management
Good morning, ladies and gentlemen, and welcome to the RELM Wireless Corporation Conference Call for the Third Quarter and Nine Months ended September 30, 2013. 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 risk factors.
The company’s actual results, performance, or achievements may differ materially from those expressed or implied by these forward-looking statements. Some of these 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 by 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 information and understandings that are believed to be accurate as of today, November 14, 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, November 22, 2013. To access the replay, please dial 877-344-7529 or 412-317-0088, for international callers and enter the code 10035043 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 third quarter and nine months 2013 financial and operating results, please contact RELM Wireless at 321-984-1414.
I would now like turn the call over to Mr. David Storey, President and CEO of RELM Wireless Corporation. Mr. Storey, you may begin, sir.
Thank you, operator. And welcome to the RELM Wireless conference call for the third quarter and nine months ended September 30, 2013. We are please you join us for today’s call. The third quarter proved to be our best quarter so far in this year and the sixth consecutive quarter of profitability. We continued strengthening our already strong balance sheet with cash and trade receivable totaling $11.4 million which is $2.8 million improvement over the end of 2012 and $2.1 million higher than the end of last quarter. Working capital has grown $24.9 million, a nice improvement with the $23.6 million at the start of the year. Inventory has been reduced for eight consecutive months and ended September almost $2 million below its high point from January of this year.
During the third quarter, we captured some significant sales wins with new customers. In July, we announced an order totaling $1.8 million from a new U.S. military customer. We also secured a number of orders from other new military customers that were below our threshold for public announcement. These wins regardless of the order size represents first time customers that believe in the RELM value proposition and represent some new be change for RELM in our quest to expand our market reach into parts of the market where we have never been before.
Most exciting we have recently secured a very important contract with an agency within the U.S. Department of Homeland Security approve a $3 billion TacCom contract vehicle. This particular customer is one we have been targeting for many years. This customer’s requirements were very exact thing and a stronghold for many years to one of our competitors. To be chosen on strength of our new KNG line of products I view as an important validation moment in the company’s evolution as a more complete provider of APCO P25 public safety Land Mobile Radio equipment. Wins like these are critical to establish a track record of extraordinary reliability, quality, world class RF performance and a level of customer service that is different than the competition. In another word, a trustworthy and attractive alternative offering of superior value at a reasonable price when compared to the competition. These are good to see the potential growth for future quarter.
The overall sales and profit performance for the third quarter 2013 fell short of the comparable quarter last year and generally did not meet our own expectations. The business environment throughout the first nine months of the year has been challenging particularly with federal state and local public safety agencies as they wrestle with budget and funding issues. Even as they face an exceptionally active hire season many of our legacy customers were not allocated the funds they required for their two way radio requirements. Most recently the federal government had shutdown congressional gridlock over budget and debt matter and exacerbated the situation. Funding for many agencies has been on hold and they simply do not know when it will be released or how much they will be allocated.
For the recent resolution albeit short term, we are hopeful that funds will start to flow to our customers. Difficulties however are not acceptable excuses for under performance. All the various obstacles aside the market is large and money is being spent on Land Mobile Radio equipment both domestically and internationally. There is more than enough business available for RELM to be successful. We have robust and impressive line of products that need more frequency and technology requirement than ever before.
At down side, it only takes one or two deals to move the needle and drive meaningful sales growth. That’s our mission every day, overcome the obstacles, find the opportunities and sell our strength and value proposition.
This concludes my overview this morning. I would now like to turn the call over to our chief financial officer, Bill Kelly, who will review the financial and operating results for the third quarter and nine months ended September 30, 2013. Afterward, I’ll make some closing remarks and then address your questions. Bill?
Thank you, Dave. Our financial and operating results for the third quarter and nine months ended September 30, 2013 are as follows.
Net sales for the third quarter 2013 totaled approximately $7.6 million, compared with $8.1 million for the third quarter last year. Sales of P25 digital products for the quarter totaled approximately $5.5 million compared with $5.1 million for the third quarter last year.
For the nine months ended September 30, net sales totaled approximately $20.9 million, compared with $21.8 million for the same period last year. Sales of P25 digital products for the nine months period totaled approximately $13.9 million compared with $14 million last year. Sales to legacy and public safety customers in federal states and local agencies declined for the quarter and these declines were partially offset with sales to military customers. And for the nine months period prior year sales benefited from some significant orders in the state, local and international markets.
Our gross profit margin as a percentage of sales for the third quarter 2013 was approximately 43.1% compared with 49.7% for the third quarter last year. For the nine months ended September 30, 2013, gross profit margin as a percentage of sales was approximately 44.2% compared with 47.4% for the same period last year. The gross profit margins for the second quarter are reflection of our total sales and less favorable mix of product sales.
Also manufacturing volumes declined due to reduced sales volume and our inventory reduction initiatives. SG&A expenses for the third quarter 2013 totaled approximately $2.5 million or 33% of sales compared with $2.6 million or 32.5% of sales for the third quarter last year.
For the nine months ended September 30, SG&A expenses totaled approximately $7.6 million or 36.3% of sales compared with $7.6 million or 34.8% of sales for the same period last year.
Engineering and product development expenses for the third quarter 2013 totaled approximately $910,000 or 12% of sales compared with $960,000 or 11.8% of sales for the same quarter last year. For the nine months ended September 30, 2013, engineering and product development expensed totaled approximately $2.7 million or 13.1% of sale compared with $2.6 million or 12% of sales for the same period last year.
For the third quarter engineering and product development expenses decreased as some of our development projects were completed. The increase for the nine months period was attributed primarily to the amortization of capitalized software and compensation expenses.
Marketing and selling expenses for the third quarter 2013 totaled approximately $903,000 million or 11.9% of sales compared with $996,000 or 12.3% of sales for the third quarter last year. For the nine month period marketing and selling expenses totaled approximately $2.7 million or 12.8% sales compared with $2.8 million or 13% of sales. The decrease for both periods was related primarily to sales commissioned and incentive compensation which directly correlate with sales performance.
General and administrative expenses for the third quarter 2013 totaled approximately $692,000 or 9.1% of sales compared with $677,000 or 8.4% of sales for the third quarter year last year. With the nine months period, G&A expenses totaled approximately $2.2 million or 10.4% of sales compared with $2.1 million or 9.8% of sales for the same period last year. For both period decreases and compensation expenses were offset by increases and public company related expenses.
Pretax income for the third quarter 2013 was approximately $767,000 compared with $1.4 million for the third quarter last year. For the nine periods pretax income totaled approximately $1.7 million compared with $2.7 million for the same period last year. The decline in pretax income is generally the result of lower sales and increased cost of products.
For the third quarter we’ve recognized income tax expense of $253,000 compared with $508,000 for the third quarter last year. For the nine month period income tax expenses totaled approximately $539,000 compared with $996,000 for the same period last year. And our income tax is primarily non cash.
For the third quarter, we’ve recognized net income of approximately $514,000 or $0.04 per diluted share versus $884,000 or $0.07 per diluted share for the third quarter of the prior year. For the nine month period, net income totaled approximately $1.1 million, $0.08 per diluted share compared with $1.7 million or $0.13 per diluted share for the same period last year.
As of September 30, working capital increased to approximately $24.9 million of which $11.4 million was comprised cash and trade receivables. This compares with working of $23.6 million and $8.6 million in cash and receivables at the end of 2012.
As of September 30, we have no borrowing outstanding under our revolving credit facility.
I would now like to turn the call back over to Dave.
Thank you, Bill. The quarter as I stated earlier was our best quarter and what is proved to be a difficult year but also a profitable one. The company’s revenue performance this year has kept the fairly close pace with last year’s performance as we enter the stretch run of the fourth quarter. With RELM’s heavy reliance on several revenues the third quarter performance was certainly impacted by the government slowdown and gridlock. The result being the quarter didn’t hit the levels we were targeting. The fourth quarter historically has been difficult for a combination of reasons. However, we have more products and technology in our arsenal today than we’ve had in the past. And the sales team myself included is working hard on the sales prospect that can turn this dynamic around.
The obvious question one might ask is, why do you feel so positive? Well, this year we have had interesting wins with new federal agencies that in the past never considered our product as solution to their requirement. We have also made positive stride in the state and local markets whereby our sales model to that market segment now rivals are federal funnel. International APCO P25 public safety sales opportunities have increased and we are actively pursuing them.
New markets and new customers all make possible by the introduction of our expensive technologically rich KNG line of products. Since the introduction of this line with P25 trunking in the fourth quarter of 2010, KNG revenues have carried the load of sales success and are building the momentum that we need to have the breakthrough win that will dramatically grow our company. I believe this and I am excited about our future.
We will now move on to the question-and-answer portion of today’s conference call. I would like to remind everyone that the company did not provide financial and operating guidance on a quarterly or annual basis and accordingly we will not address questions in that regard. Operator, we are now ready to open the floor for questions.
(Operator Instructions). First question comes from Sam Bergman from Bayberry Asset Management.
Sam Bergman – Bayberry Asset Management
Good morning, Dave and Bill. I wish we have the weather you guys have. A couple of questions, can you give us a little bit more color in the commentary you said ample sales prospects, can you give us a little bit more color on that comment?
Sure. The KNG line, historically the company has been – were at the edge of – at a conventional radio centric company and it really, we could only address very small percentage of the market. The KNG line and this is public safety demand. Public safety demand isn’t like your typical consumer type demand. It’s very net related, it’s long – it takes long decision cycles by all levels of government related such as state or local and so this new KNG line we rolled out with all these great features in our value proposition. And I would direct you to our website where you can access that value proposition and see how they different to these this powerful product line which is exciting.
We continue to have products and we continue to have features that are trying to keep pace with the market leader. I mean that’s our target. And that’s where the market opportunities reside. The exciting thing about this line is you’ve heard me for years talk about spending it to other frequency UHF, T-band, 700-800 and we even have mesh project with a company that is we partner with. And which uses our KNG technology. So these are all market expansion moments for RELM and its product line. These products do have to get accepted. One of the great thing that the market leader have is momentum, a years of momentum and they supply world class products and they have captured the hearts and minds of the customers. But they also drive the customer to very high prices. And RELM’s value proposition is to offer great value and that level of quality in our out performance at a fair reasonable price usually at third of the market leaders. And we connect with profits doing that.
That’s our business model. A lot of people think that success can happen overnight, it can’t, I wish it could, I work for it and team works for it every day so let it could but it doesn’t work out that way. But the wins we had this year as we enter the fourth quarter were pretty heartening I think. The DHS win through the TacCom vehicle is in practice. More and more agencies we believe are going to use that vehicle. We really push the fact that RELM is the small business and it should be small business set aside back in help to learn keep on. We do get the product and enhanced of the end users. The product can sell itself, were similar to our legacy product the D-Series. The D-Series we are the major – we are the market leader in that niche the Forest Service, DOI and that area of the market. But that took years to get that level of acceptance. Now we think that it can be accelerated because of our value, and because the government, all government has to be more efficient in their utilization of their funds they have to save money, we really push that issue.
The other thing that we really try to focus on here is a new set of customers, new state and local customers the Pennsylvania press release that you saw a week or so ago is impressive that was with a partner an integrating partner who we’ve been working with there is more than the out there, I am not going to lay out exactly what they are but you know but as we analyze the funnel activity, the state and local opportunities are growing, and that problem with all of this public safety type demand, their schedule tend to slip. And sometimes they can slip by quarters or sometimes by years. But we are in front of more and more of them and I think we can take; we can leverage the success that the line is now having, and growing. We want to analyze the numbers; the KNG line is now starting to carry the load and outselling the legacy product. That’s important as the company grows, as budgetary up and as people wise up I think we’re going to get a fair chance of leading more of the market so – and then you’ve heard me saying we’ve had some discussions about the international opportunities. In the past, our legacy products was not a good shift for those opportunities, the KNG line is I mean it’s a very sleek product, you’ve seen it, it’s small, light, compact, great features, high quality, great RF performance I mean at the end of the day these are the RF performance is critical. And that’s where we really I think outshine the competition.
We’re really targeted to be a Motorola like quality product. And I think we can change it, we have great engineers, and have a great engineering team that is working on lot of things. The international opportunities are real; we’re working on some as we speak. And if it’s possible, we could have wins, sure, I’m not going to say exactly where we’re at, there’s some in Central America, some in South America, some internationally and in the Far East. So we were at. It’s funny we were at the International Police Chief show in Philadelphia not so ago and we have a lot of international interest come by our booth and look at our value. And some of these players we have been talking to in years past.
So again there are 86 countries out there and we’re going to figure out ways to get the product in front of them. So that’s sort of the color without giving you the bloody details about what counties and what cities which I’d rather not give on this call because it is our target, we do have competitions Sam, it does –
Sam Bergman – Bayberry Asset Management
No. I totally understand. And just a follow-up question, in terms of the company’s performance, I still think the stock is very underpriced, it should be selling at two and half times to three times sales. You have a lot of cash, I know you haven’t used to buyback at all. Is it possible that some of that money put aside for the buyback or when it was announced could be used at these prices or not?
Do you mean for buyback?
Sam Bergman – Bayberry Asset Management
For sure it is possible but it is a board level decision and I have a board meeting coming up in early December and it would be a line item of competition. It’s certainly will be a major item that we discuss, yes, and what we are seeing since we implemented this buyback, we have seen a change in the process as and we’ve changed the rules accordingly. But the fact that we haven’t implemented anything is only because that we haven’t hit the thresholds and the stock price has stayed above the thresholds that we set for buyback. But that can change and of course that will change under the guidance of the Board of Directors.
Sam Bergman – Bayberry Asset Management
Okay, great success in the fourth quarter, I’m sure you’ll do better than we all expect, thank you.
We’re really expecting to, we’re working hard for it, Sam. Thank you very much.
This concludes our question and answer session. I would now like to turn the conference back over to David Storey for any closing remarks.
Thank you, Frank. 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 fourth quarter and full year 2013 results in March of 2014. Thank you and have a good day.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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