RF Industries, Ltd. — FY2023 Form 10-K
Reporting period: Fiscal year ended October 31, 2023, compared with fiscal 2022. Although the request metadata says “2022 Q4,” the filing is the company’s FY2023 annual report, filed January 29, 2024.
Business context
RF Industries designs, manufactures and markets RF connectors and components, cable assemblies, fiber-optic and custom cabling, wiring harnesses, telecom cooling systems, and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling. Wireless and broadband communications are major end markets. Microlab, acquired in March 2022 for approximately $24.5 million, is included in the RF Connector segment.
Financial performance and position
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $72.2 million | $85.3 million |
| Gross profit / margin | $19.5 million / 27.1% | $24.5 million / 28.8% |
| Operating income (loss) | $(3.8) million | $2.2 million |
| Net income (loss) | $(3.1) million | $1.4 million |
| Diluted earnings (loss) per share | $(0.30) | $0.14 |
| Cash provided by operating activities | $4.2 million | $2.9 million |
Revenue fell 15.4%. Custom Cabling sales declined 37.2% to $26.2 million, primarily amid slower wireless-carrier deployments affecting hybrid-fiber, small-cell and cooling products. RF Connector sales rose 5.5% to $45.9 million, primarily reflecting Microlab. Gross margin declined 1.7 percentage points, with management attributing the decline to lower sales and mix. Selling and general expense increased to $20.2 million, or 28.0% of sales, from $19.4 million, or 22.8%.
Operating cash flow was positive despite the net loss, aided by collections and reductions in receivables and inventory, as well as changes in other current assets. Investing cash outflow was $2.5 million, primarily capital expenditures; financing cash outflow was $1.3 million. Cash increased $0.4 million to $4.9 million.
At year-end, working capital was $23.5 million and the current ratio was approximately 2.9. Total assets were $82.3 million, total liabilities $42.5 million, and stockholders’ equity $39.8 million. Debt included $13.2 million outstanding under the term loan and $1.0 million on the revolving facility; the balance sheet reports the term loan net of issuance costs. The company also had $20.6 million of operating lease liabilities. Backlog decreased to $16.1 million from $27.8 million.
Material changes, outlook and risks
- Debt amendments and covenant relief: The company failed its debt-to-EBITDA and fixed-charge-coverage tests for the period ended July 31, 2023, and obtained a waiver. The September 2023 amendment waived those tests through July 2024 and established liquidity and quarterly EBITDA requirements. A January 26, 2024 amendment eliminated the January 2024 minimum EBITDA requirement, reduced the revolving line from $3.0 million to $500,000, and lowered the minimum-liquidity requirement to $2.0 million. It also required an additional $1.0 million term-loan principal payment on March 1, 2024 and could impose a 1% fee on outstanding loan balances if the facility was not repaid by that date. The company paid down $500,000 on the revolver in connection with the amendment.
- Liquidity and going concern: Management said cash and operating cash flows were expected to meet anticipated needs for at least the next twelve months, and expected covenant compliance under the amended agreement. It cautioned that weaker-than-forecast earnings or cash flows could require further amendments; failure to secure relief could lead to default, accelerated repayment and threaten the company’s ability to continue as a going concern. The auditor identified the going-concern assessment as a critical audit matter; the filing does not report a modified audit opinion.
- Management actions and outlook: The company reported cost-cutting efforts, facility consolidation and plans to pursue operating efficiencies, organic growth and further cost reductions. It provided no quantified revenue or earnings guidance. Backlog is not necessarily indicative of future demand and may fluctuate or be cancelled.
- Other risks and unusual items: Key risks include dependence on wireless-industry spending, major customers and independent distributors; third-party manufacturers and Asian supply chains; inflation and costs that may not be passed through to customers; competition and technology shifts; and debt covenant and refinancing risks. FY2023 included approximately $0.9 million of specified one-time charges, including rent-related expense, facility move costs, severance, ERP implementation and bank fees. The company reported no goodwill or other impairment in FY2023 despite impairment reviews of Microlab and Schrofftech. No material non-ordinary-course legal proceeding was reported.
- Other: No dividends were paid in FY2023. Management concluded internal control over financial reporting was effective; the auditor was not required to attest to that assessment because of the company’s smaller-reporting-company status.
Important facts for investors to verify
- Post-amendment loan balances, the March 2024 payment and fee terms, remaining maturity obligations, and ongoing liquidity and covenant compliance.
- Whether wireless-carrier spending and Custom Cabling demand recover, and how the $16.1 million backlog converts to shipments and revenue.
- Cash-flow quality and working-capital movements, including the timing and collectability of remaining receivables and tax credits.
- Microlab and Schrofftech performance and the assumptions supporting the no-impairment conclusions for their acquired assets.
- Customer and distributor concentration, supplier continuity, and the effect of inflation and shipping costs on margins.