RELM Wireless Corporation (RWC) Q4 2016 Earnings Conference Call March 2, 2017 9:00 AM ET
William Patrick Kelly - CFO, EVP, Secretary
Tim Vitou - President
Mark Jordan - Noble Financial Group
Al Shams - American Capital Partners
Ed Shultz - Private Investor
Good morning, ladies and gentlemen, and welcome to RELM Wireless Corporation's Conference Call for the Fourth Quarter and Year ended December 31, 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 to questions.
Before turning the call over to Mr. Kelly 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, March 01, 2017, and we do not undertake any duty to update forward-looking statement.
I’ll now turn the call over to Mr. William Kelly, Executive Vice President and CFO of RELM Wireless. Mr. Kelly, you may now begin.
William Patrick Kelly
Thank you, Rob. Good morning and welcome to the RELM Wireless conference call for the fourth quarter and year ended December 31, 2016. Joining us on the call today is Tim Vitou, the President of RELM Wireless Corporation. Tim was recently promoted to President after serving as our Senior Vice President of Sales and Marketing for the past nine years. Tim brings to his new position a broad base of relevant experience within our industry and markets, as well as with RELM. The RELM team is excited to welcome Tim in his new role and we look forward to continuing our momentum in growth under his leadership.
With that introduction, I will turn the call over to Tim for his prepared remarks. Tim?
Thanks, Bill. Good morning and thank you for participating in today's call. I’m pleased to be here and I look forward to what I believe is a bright future for the Company and you, our shareholders.
2016 was an extremely exciting year for RELM. Some of the highlights included: realizing strong financial and operating results for the year, while generating cash and strengthening our balance sheet. Initiating a capital return program that included cash dividends and stock repurchases. Launching the next generation of our KNG product line the KNG2 series, which builds and improves upon our original KNG line and represents a critical part of our future. Realizing continued success in our international sales, in particular expanding our market share in Canada. Implementing a series of significant organizational changes, which we believe will benefit the Company and its shareholders in achieving our strategic objectives.
Focusing for a moment on our financial -- in operating results in 2016. The primary catalyst behind their improvement was sales growth. Sales for 2016 were a Company record, exceeding $50 million for the first time in more than 20 years and representing an increase of over 70% from the previous year.
The sales growth was driven in large part by the contract with the United States Transportation Administration, the TSA. This was a large undertaking and involve the coordination of every facet of our operation in concert with TSA staff at hundreds of airports in and out of the continental United States.
In less than a year, we deployed over 19,000 radios, 147 repeater systems, and a 131,000 accessories to 406 airports. We also implemented a 24/7 technical hotline and helpdesk to manage installations, troubleshoot problems, and administer preventive maintenance. Overall the program has been a landmark success and the feedback from the TSA has been overwhelmingly positive.
Our performance in this initial phase was important as we look forward to more business from the TSA with three additional option years approaching. While the TSA was the largest contributor to 2016 sales, there were others. It's a good indicator of the Company's growing sales and market presence that even without TSA our sales grew approximately 10%.
This growth was derived from our success in Canada, primarily with Alberta Health Services. AHS provides health services throughout Alberta and it's the largest provider of healthcare in Canada, presently deploying approximately 3,000 two-way radios in a range of applications such as hospitals, urgent care centers, psychiatric facilities, and emergency vehicles.
Domestically we also experienced resurgent demand in 2016 from our base of legacy customers in the wildland fire-suppression community. Operationally blended gross profit margins in 2016 were below customary levels, which reflect competitive factors associated with the TSA contract.
However, gross profit margins for sales outside of the TSA contract were more typical and consistent with recent years. Increases in SG&A expenses were primarily attributed to staff expenses and incentives related to our improved sales and operating performance.
Primarily on the strength of sales growth, operating income increased 200% in 2015 and we generated $10.7 million in cash from operations. This performance enabled us to implement a capital return program during the year under which we declared and paid three quarterly dividends of $0.09 per share returning approximately $3.6 million to shareholders. The program also provided for the repurchase of up to 500,000 shares of RELM common stock. Through December 31, 2016, we repurchased over 30,000 shares.
Beyond strong financial and operating results in our core business, the foundation for the Company's futures growth was solidified by the 2016 launch of the next generation KNG2 product line. The KNG2 builds upon our initial KNG products by featuring performance enhancements along with an array of new features and functionality, all designed to attract new customers and build market share.
As previously mentioned over the past several quarters, and added strategic focus of the Company has been to supplement our core business by driving growth and performance from initiatives outside of our traditional niche in land mobile radio. For example, we hold a significant investment in a company named Iteris. The initial investment was made in 2015 and we added to our position in 2016. This investment has performed well yielding over $3 million in unrealized pre-tax gains. Approximately $2.1 million after-tax.
Our management team and executive committee of the Board are focused on evaluating additional potential strategic opportunities that can complement our strength in LMR and help maximize shareholder value. 2016 was an exciting year for RELM, filled with successes and key changes that we believe position the Company for even greater success moving forward.
This concludes my overview this morning and I’d like to turn the call back over to our Chief Financial Officer, Bill Kelly, who will review the financial and operating highlights for the fourth quarter and year ended December 31, 2016. Bill?
William Patrick Kelly
Thanks, Tim. Following are the highlights of our financial and operating results for the fourth quarter and year ended December 31, 2016. Net sales for the fourth quarter 2016 increased 4% to approximately $7.2 million compared with approximately $6.9 million for the fourth quarter last year.
For the full-year of 2016, net sales increased 70.5% to approximately $50.7 million compared with $29.7 million for the previous year. Sales of P25 digital products for the quarter increased approximately 13.1% to $5.1 million compared with $4.5 million for the fourth quarter last year. For the full year of 2016, P25 digital sales increased 64.5% to $33.2 million compared with $20.2 million for the same period last year.
As Tim mentioned, the increase in total digital sales was attributed primarily to the TSA and were supplemented by international sales and sales to other federal and state public safety agencies.
For the year, gross profit margins as a percentage of sales were 33.7% comparatively gross profit margins for the prior year were 41.3%. In 2016 gross profit margins were impacted by competitive factors associated with the TSA business. For the fourth quarter 2016, gross profit margins returned to more customary levels at 41.9%, as shipments to the TSA were completed in the third quarter.
For the year, selling, general and administrative expenses totaled approximately $12.8 million or 25.2% of sales compared with $10.9 million or 36.5% of sales for the previous year. SG&A expenses for the fourth quarter totaled approximately $2.7 million or 37.1% of sales compared with $2.4 million or 35.2% of sales for last year's fourth quarter.
The higher expenses for both periods include sales and other incentives directly related to improved Company performance as well as engineering staff and expenses to further our development initiatives.
Net income for 2016 increased 158% to approximately $2.7 million or $0.19 per diluted share compared with $1 million or $0.08 per diluted share for the prior year. Net income for the fourth quarter totaled approximately $92,000 or $0.01 per diluted share compared with $213,000 or $0.02 per diluted share for the same quarter last year.
We generated approximately $10.7 million in cash from operations during 2016. Since the inception of our capital return program, we paid $0.39 [ph] per share quarterly dividends returning $3.6 million to shareholders.
Through December 31, 2016, we’ve repurchased just over 30,000 shares of our common stock. Our working capital totaled $23.4 million as of December 31, 2016, which compared with $23.9 million as of the end of 2015.
I will now turn the call back over to Tim.
Thank you, Bill. 2016 was a positive year for the Company on several fronts. Most importantly, it set the stage for the future with new products in the market, new leadership structure, and a new strategic vision we believe the future holds great promise. Our mission now is to turn that promise into a reality. We look forward to accomplishing that in the coming quarters and years.
We will now move on to the question-and-answer portion of today's conference call. I would like to remind everyone that we do not provide financial and operating guidance on a quarterly or annual basis. And accordingly, we will not answer questions in that regard.
Operator, we're now ready to open the floor to questions.
Thank you. [Operator Instructions] Thank you. Our first question is from the line of Mark Jordan with Noble Financial. Please proceed with your questions.
Hi. It's Mark Jordan. Good morning, Bill, and Tim. Quick question relative to the -- your press release in January were you announced management changes. You stated in that press release that they saw significant opportunity to improve the financial performance of RELM. What are the catalysts that would be teed-up that improved performance?
Thank you, Mark for the question. We believe that our improved performance was going to be expanding our marketplace, expanding our market share. We believe that with the advent of some of our newer latest products that it allows us to attack a bigger portion of the market. So, we believe that by adding a top line revenue and getting far more efficient in the rest of our financial package that we think will see that financial growth.
Okay. Could you talk about your pipeline of opportunity? I mean, obviously you’ve got a large contract with TSA that was executed on this year and could you characterize what your pipeline is for business in '17?
We’ve -- coming from -- freshly from the sales world this is a near and dear subject to me. I know it intimately. We have continued to grow our pipeline year-over-year by expanding into new markets like into Canada. The success in Alberta Health Services has opened up doors for us in that market. I think that our pipeline every year has grown not only in operate organic growth, current customers expanding their market share with us but also exponential growth, finding new customers based on the reference accounts that we won over the past years including TSA.
Okay. A final question for me is, you talked about expanding beyond your historic niche in land mobile. What role would or do you see M&A activity potentially taking place in terms of expanding that to the Company?
I guess, it's premature for me to respond to that, Mark, being in the role for a little over a month. I know that working closely with our executive committee, Kyle Cerminara and Tim O'Neil on our Board, they’re very, very consistently looking at opportunities for M&A growth. Frankly, I don't have anything to share at this point in particular. No specifics that I could add to that, other than it is a very key focus for the executive committee to be searching for new opportunities.
Okay. Thank you very much.
Thank you, Mark, for your questions.
Thank you. Our next question is from the line of Al Shams with American Capital Partners. Please proceed with your question.
Yes, good morning and congratulations, Tim. I wish you good luck.
Thank you, Al.
I’ve been a long time shareholder in the Company. Recently an investment firm came out with some very negative comments with regard to Motorola Solutions, and I guess really what they've stumbled on is what we believe that for years and years, that Motorola has a high cost product -- they’ve kind of rig the bidding process I guess to win orders. How are we going to take advantage of that? I mean, this has been ongoing for a long, long time and it seems like we should have got more -- we should have taken more out of there rather than we’ve in the past.
Well, if I’ve heard that before that’s very helpful.
I believe, Al, thank you very much for your kind words and thank you for your question. The focus that we have internally is not what our competition is doing, but what we can do. We have fought against this very, very, very capable competitor for ever. They’re a world-class organization and I'm not going to make comments regarding whether or not they’re stacking [indiscernible], we’ve always tried to present our Company in a very positive like and not a negative one against anyone particular competitor. That said we try and focus on what we believe is the true value proposition that we bring to market. We’ve a very high quality product, and we believe at a very fair price. And we focus hard on our game and explain to the customers that are willing to listen, that value is really what we should be targeting. And we think -- and believe it or not, I've seen the movement not only in Washington DC, but also at the state and local arena, that’s starting to resonate. Stuff like the recent article that came out other people that have to make opinion on that, I focus on the customers, I focus on what we think we bring to the party, and I truly believe its resonating louder now than ever. So I appreciate the comment, Al.
Okay. Okay, thank you.
[Operator Instructions] Our next question is from the line of Ed Shultz with Private Investor -- is a Private Investor. Please proceed with your question.
Good morning, gentlemen. Thank you for taking my questions. Two questions I have. The first one today, looking at the fourth quarter comparing it to last year or pre-tax income was up 50%, yet the after-tax income was only about half. I was wondering if you could explain that a little bit further and let us know what you think your tax rate will be going forward?
William Patrick Kelly
Yes, Ed. This is Bill Kelly. That relates primarily to State of Florida net operating loss carryforwards. If you look closely at the footnote on income taxes, we recognize or take the value of Florida State NOLs at about half the rate that we do federal NOLs. And because of that we have some very big Florida NOLs that are particularly from about 18 years ago, and because we’re only taking it to half the rate there's some doubt about whether we will be able to utilize all of the Florida NOLs. So in the fourth quarter we took the valuation allowance associated with those Florida NOLs, which effectively drove the fourth quarter tax rate up a bit. Going forward, I don't foresee any aberrations like that and I would expect our tax rate in 2017 to be roughly 35%.
Yes, okay. Thank you. And then the next question I have is on the dual band radio. I guess for a little over a year now we’ve been looking forward to this products coming to market. Tim, I wanted to see what that -- what the status of that was at this time?
Current we’re going through all of our product development reviews. We're looking at all of the status of all of our products, above and beyond just dual band product. Everything at this point is still on target. We have some additional things that we’re looking at besides the roadmap we had been working on. So we're looking constantly at to figure out what are the next stages based on what the market -- current market conditions are. So right now we're still on plan for all of the releases we thought we would have and we're even looking to see if there are some additional things we want to get into.
Okay, tremendous. That’s all I had today and thank you very much.
William Patrick Kelly
Thank you, Ed.
Thank you. I will turn the floor back to management for closing remarks.
William Patrick Kelly
Thank you, operator. And I’d like to thank everyone for participating in today's call. We look forward to visiting with you again when we report on our first quarter 2017 results in May. Thank you and have a good day.
Thank you. This conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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