RELM Wireless Corp. (NYSEMKT:RWC) Q2 2016 Earnings Call August 4, 2016 9:00 AM ET
David Storey - President and Chief Executive Officer
Bill Kelly - Chief Financial Officer
Ed Shultz - Private Investor
Allan Lyons - Private Investor
Good morning, ladies and gentlemen, and welcome to RELM Wireless Corporation's conference call for the second quarter and six months ended June 30, 2016. This call is being recorded. All participants have been placed in a listen-only mode. Following management's remarks, the call will be opened up to questions.
Before turning the call over to Mr. Storey for opening remarks, I will provide the following Safe Harbor statement. Statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are subject to known and unknown factors and risks.
The company's actual results, performances 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 RELM's filings with the SEC. These statements are based on information and understandings that are believed to be accurate as of today, August 4, 2016, and we do not undertake any duty to update forward-looking statement.
I’d now turn the call over to Mr. David Storey, President and CEO of RELM Wireless Corporation. Mr. Storey, you may begin.
Thank you, operator, and welcome to the RELM Wireless conference call for the second quarter and six months ended June 30, 2016. We are pleased you could join us for today's call.
After beginning the year with a record setting quarter for sales, I’m pleased to report that we followed up with an even better second quarter, establishing a new company sales record for the second consecutive quarter.
Sales for the second quarter totaled $16.7 million, a 153% higher than last year’s second quarter and 38% greater than this year’s first quarter. For the first six months ended June 30, 2016, sales totaled $28.7 million which was nearly 90% higher than last year’s six months period. Operating income for the quarter totaled $2.1 million, a substantial improvement of our last year’s second quarter of a $107,000 and a 174% improvement over our first quarter performance of $766,000.
The primary contributor to our sales increase in Q2 was the large backlog of over $20 million we entered the quarter with, thanks to our successful capture of the Transportation Security Administration account.
The TSA win is just the start of what we expect to be a series of wins made possible by our KNG line of products. This expansive technologically powerful product line offered in all of the public safety frequency bands, as expanded RELM’s reach into markets and sales opportunities previously unreachable.
Now, the product line becomes more acceptable to potential new customers in federal, state and local and international venues. We can explain our compelling value proposition of high quality, ease of use, technological strength all had a fair price designed and manufactured right here in the USA.
During the second quarter, sales to the TSA which includes the original delivery order of $26.2 million plus the follow-on accessory order received in February of $4.2 million, totaled $8.5 million. TSA sales for the first six months of the year stand at $11.7 million with shipments of over 16,000 radios and 94 repeaters to 303 airports.
The overall operations’ team has responded exceptionally well to the demanding requirements of this most important customer. We anticipate fulfilling the remaining portion during the third quarter of this year.
During the second quarter and six months period, sales to customers other than the TSA also showed continued strength. For the second quarter non-TSA sales totaled $8.1 million which alone is 22% higher than last year’s total Q2 sales. For the six months period, non-TSA sales totaled $17 million and were 6% above last year’s total sales for the same time frame. In other words, even without sales to the TSA, our sales for the second quarter and six months ended June 30 grew in comparison with the same period last year, a healthy side.
Contributors to non-TSA sales included new international customers such as Alberta Health Services who recently exercised all four option years that were available on their contract with RELM, now extended through March of 2020. We’ve also realized substantial sales from traditional customers in federal and state wildland fire suppression agencies in particular have fire a long-term RELM value customer, driven apart by the extraordinary fire activity in the Western United States. RELM stands ready as usual to support their critical mission.
Consistent with the first quarter, gross profit margins were lower than customary levels coming in at 33.6% for the second quarter, but showed a 2% improvement over Q1. As I stated on our first quarter call, blended gross profit margins were impacted by the margins on some of the TSA orders. This was a consideration we accounted for in analyzing the competitive landscape and developing the strategy to win this key reference account.
The improvement in second quarter gross profit margins were driven by product cost reductions and manufacturing efficiencies resulting from the increased throughput which allowed us to better observe our manufacturing support expenses resulting in a positive impact to gross margin. Sales to other customers in the second quarter yielded more typical gross profit margins of 45.6%.
Our operations yielded positive cash flow totaling $7.1 million for the first six months, even after distribution of our $1.2 million quarterly dividend in June. Working capital grew $654,000 to a solid $24.5 million and inventory was reduced by $1.2 million during the second quarter.
As a result of the company’s strong performance and our analysis of future prospects in May we announced an implement, a twofold capital return program which is comprised of a quarterly dividend of $0.09 per share and a stock repurchase plan. As of June 30, 2016 we had repurchased 3,900 shares and are continuing to execute daily in accordance with the parameter established by the board. And our next quarterly dividend will be issued on September 16.
Looking ahead, we have several exciting new product and technological initiatives which will increase our market reach. Our next generation KNG2 has been completed and released for production. The KNG2 is the embodiment of our philosophy of listening to the customer. Many features and functions have been added, along with internal GPS, Bluetooth technology, new larger color display, additional program buttons and a new look case that can utilize all of our exiting accessories. This product will be our top of the line targeted at the competition strong hold, and even though it will command improved margin performance for us, it will priced to aggressively attack the market leaders at the third of their price, a strategy that we’ve used successfully throughout the years.
We’ve also assembled accounting and impressive engineering and development team they’ve been working diligently on products that will address market expanding possibilities, like the first portable high spec dual band radio and an LTEP25 push-to-talk solution that is targeted for the coming first net market.
Meanwhile, we’ve extended our reach beyond RELM’s traditional LMR focus into other areas, that we believe whole promise. One-touch area is our investment [indiscernible] which now stands at approximately 1.8 million shares, 5.2% of the total outstanding shares. Since our initial investment last year, we’ve accumulated $1.4 million in unrealized gains. Moving forward, we will continue to evaluate this investment and explore additional alternatives to maximize shareholder value.
So in summary, I’m pleased with the first six months which had materialized as planned. We are now focused on our pipeline of new prospects and achieving a great second half of the year while positioning RELM for a strong 2017.
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 for the second quarter and six months ended June 30, 2016. Afterwards I’ll make some closing remarks and address your questions. Bill?
Thank you, Dave. Following is the summary of the highlights our financial operating results for the second quarter and six months ended June 30, 2016.
Net sales of $16.7 million for the second quarter were approximately 152.9% above last year’s second quarter and 38.1% higher than the first quarter this year. Net sales of $28.7 million for the six months period increased almost 90% from the same period last year. Sales of P25 digital products for the quarter were up 156.8% to $10.5 million and for the six months period, P25 digital sales increased 76.2% to $18.4 million compared with the same period last year. As Dave mentioned earlier, the increase in total and digital sales was attributed by [indiscernible] of the TSA, but were supplemented by sales to federal and state public safety agencies in the wildland firefighting community.
At 33.6% the second quarter gross profit margins as a percentage of sales improved 2% from the first quarter this year. Comparatively gross profit margins for last year’s second quarter were 36.2%. Gross profit margins for the six months period totaled 32.8% compared with 40% for the same period last year. Gross profit margins were impacted by competitive factors associated with the TSA business. However product cost reductions and increased manufacturing volume combined to partially mitigate those factors during the second quarter.
Selling, general and administrative expenses for the second quarter totaled approximately $3.5 million or 21% of sales compared with $2.3 million or 34.6% of sales for last year's second quarter. For the six months period, SG&A expenses totaled $6.6 million or 22.8% of sales compared with $5.1 million or 34.4% of sales for last year’s six months period.
The higher expenses for both periods includes sales and other incentives directly related to the improved company performance as well as engineering staff and expenses to further our development initiatives.
Net income for the second quarter increased significantly to $1.4 million or $0.10 per diluted share compared with $78,000 or $0.01 per diluted share for the same quarter last year. Net income increased for the six months period to $1.9 million or $0.14 per diluted share compared with $617,000 or $0.04 per diluted share for the six months period last year. We generated $7.1 million in cash from operations during the first six months of 2016, $4.5 million that are generated during the second quarter. In the second quarter we launched a capital return program under which $1.2 million was distributed to shareholders in the form of a $0.09 per share quarterly dividend and yesterday we announced the second $0.09 per share quarterly dividend payable on September 16 to shareholders of record as of September 1.
The capital return program also includes share repurchases and during the second quarter we repurchased 3,900 of our shares as of June 30. Working capital totaled $24.5 million as of June 30, compared to with $23.9 million as of the end of 2015.
I’ll now turn the call back over to Dave.
Thank you, Bill. The first six months of this year has been extremely successful on numerous fronts. Sales growth is the most obvious indicator bolstered significantly by the large backlog of orders, but the sales numbers alone don’t tell the complete story.
Executing a large contract such as the TSA is challenging and complex undertaking with many operational and logistical details to manage. I’m proud to say that your RELM team has responded superbly to the challenge. Members of every discipline at RELM had collaborated with suppliers and most importantly the customers. To develop and deliver very large quantities of products on time in a compressed timeframe, while maintaining our signature high level of quality and customer service. This isn’t our assessment, it’s the customers’.
The next option year in this five year agreement has already been exercised entirely another positive indicator of the customer satisfaction. Our schedule with the TSA calls for fulfillment by the end of September. It appears we’ll beat that schedule by a month.
Accomplishing this level of success in the first six months naturally generates elevated expectation. The performance bar is now higher, that is our focus today to make the TSA win only the first in the series of significant contracts and orders for RELM.
Our current sales pipeline contains several such opportunities. Our sales stack is already in hot pursuit of new markets and customers to drive the growth we all expect.
Your company quietly has become the model of consistently profitable performance. This quarter marks our sixth consecutive quarter of profitability and 19th out of the last 20, not bad. With continued execution of our business plans resulting in sales growth we will maintain this good practice.
We will now move on to the question and answer portion of today’s conference call. I’d like to remind everyone that we do not provide financial and operating guidance on the quarterly or annual basis, and accordingly we will not answer questions in that regard. We are now ready to open the floor for questions operator.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mr. Ed Shultz from Private Investor. Please go ahead.
Yeah, good morning Dave and Bill, wonderful quarter there. I’ve got a couple of quick questions here. The first one was, the initial contract it’s actually two portions, I believe about $1.6 million was for repeaters and I believe in the last conference call you indicated that the – there were no repeaters sold or delivered in the first quarter. I wanted to find out were all they delivered in the second quarter or is there still some work to be done on that in the third quarter?
The majority of them have been delivered, actually 68% of them have been delivered repeaters. We’ve delivered over 90, there is a 147 told repeaters in this first contract with the TSA.
Okay, tremendous. And then next question I have is a book keeping item. On the [indiscernible] investment, you’ve been putting that on the balance sheet after tax. The question I have is it was purchased nearly a year ago, is that tax rate that you use on that, is that a short-term capital gains rate and will that drop down once it becomes a one year item?
It comes one…
That is an ordinary income tax rate as we – it should be about a year now, so I would expect as we continue that to drop into capital gains tax rate. But right now it is ordinary income at our normal tax rate.
Okay, so assuming nothing else changes the – we don’t the position and the stock price remains the same. Once that drops since the capital gains rate the value of that should actually rise on the balance sheet, is that correct?
Okay, tremendous. Okay, and then the last question I have is on the dual band radios, I believe on the last call you had indicated that you thought that they’d be ready by about year end. Is that still a target on that?
It is still the target and I feel very good about the acceleration that my engineer team at Kansas is executing. We’ve hired some additional talent along with the all these strong team we’ve assembled, I see that product moving faster and it’s really focused on – that product is really focused on our legacy customer base and they have great interest in this and it’ll be a nice – it’ll address a nice niche of market opportunity for us that we could realize in 2017, and that’s what we’re planning for.
Okay, tremendous. That concludes my questions and once again congratulations on the great quarter. Thank you.
The next question is from Allan Lyons, Private Investor. Please go ahead.
Thank you. Congratulation guys, really fantastic results so far for 2016 and it sounds like you’ve got a good opportunity this could continue that way. Because of that, I just wonder what you’re doing in terms of investor relations like getting analysts coverage, I know you’re at the Noble Conference and what are you doing there to get more people familiar with the stock so we can be – a company that trades more share per day than based upon the performance or more interest on the company, especially with the dividend and everything else you’ve got going.
Well, as you know, our focus has been the operational – we’ve gone down the IRR path in the past and have been very successful. I think only because the company was at a size where it really wasn’t on the radar screen. We continue to execute at this level and beyond, I think that topic becomes a major initiative. We do have pretty sophisticated board of directors that ongoing a lean towards their advice in this area and – but I think ultimately as we grow the company you’re going to see more activity in that area.
Okay, it certainly warranted and I think that with your size and your performance that there would be a smaller boutique forms that would be interested in covering the company.
Do you have any invested conferences planned for the rest of the year at this point?
At this time I do not have anything planned, no, I do not.
This was the last question. We would like to conclude the call.
That was the last question. Well, thank you operator, 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 third quarter results in November of 2016. Thank you and have a good day.
Ladies and gentlemen, the conference is now over. Thank you for participating in the conference. You may now disconnect your lines. Good bye.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!