RF Industries, Ltd. — Form 10-Q Summary
Period: The filing covers the quarter and six months ended April 30, 2019, and was signed June 12, 2019. The request metadata says “2018 Q2,” but the filing itself is for fiscal 2019 Q2.
Business and financial performance
RF Industries manufactures and markets interconnect products and systems through its RF Connector and Custom Cabling segments. On March 15, 2019, it acquired the assets and business of C Enterprises for $600,000 in cash and assumed certain liabilities; C Enterprises contributed $1.7 million of revenue through April 30.
| Metric | Three months ended April 30, 2019 | Three months ended April 30, 2018 | Six months ended April 30, 2019 | Six months ended April 30, 2018 |
|---|---|---|---|---|
| Net sales | $13.6 million | $20.5 million | $24.3 million | $28.5 million |
| Gross profit / margin | $4.1 million / 30% | $7.6 million / 37% | $7.2 million / 30% | $10.1 million / 36% |
| Operating income | $1.4 million | $4.0 million | $2.1 million | $4.3 million |
| Income from continuing operations | $1.1 million | $3.2 million | $1.7 million | $3.5 million |
| Consolidated net income | $1.1 million | $3.2 million | $1.7 million | $3.7 million |
| Diluted EPS | $0.11 | $0.34 | $0.17 | $0.40 |
All financial amounts above are in U.S. dollars. In the prior-year periods, discontinued operations contributed $39,000 of after-tax income for the quarter and $189,000 for the six months; the company sold Comnet in October 2018.
Liquidity, cash flow and financial position
- At April 30, cash and cash equivalents were $13.9 million, current assets were $30.5 million, current liabilities were $4.7 million, and working capital was $25.8 million. The reported current ratio was approximately 6.5:1.
- The company reported no outstanding borrowings. Total liabilities were $4.7 million and stockholders’ equity was $29.7 million.
- For the six months, continuing operating activities used $1.8 million of cash; investing activities used $656,000, including $457,000 net cash paid for C Enterprises; financing activities used $16,000. Cash declined $2.5 million from October 31, 2018.
- Management attributed operating cash use mainly to higher receivables and inventory, and lower accrued expenses, including payment of prior-year bonuses. Capital expenditures were $199,000; dividends paid were $373,000.
Material changes and management commentary
- Quarterly sales fell 34% year over year; six-month sales fell 15%. Management attributed the decline mainly to unusually large Custom Cabling orders in the prior-year comparison period. Custom Cabling sales declined, while RF Connector sales rose 22% in the quarter and 23% for the six months.
- Gross margin declined, which management attributed primarily to higher outsourcing costs in Custom Cabling and the unusually high prior-year sales base. Quarterly operating expenses fell, but selling and general expense as a share of sales increased to 18% from 15%; current-quarter expenses included approximately $100,000 of C Enterprises acquisition costs.
- Management reported a $10 million backlog at April 30, 2019, compared with $11 million at October 31, 2018, and said bookings continued while shipments were maintained. It cautioned that orders may be canceled and future orders are difficult to predict.
- Management believes available assets and expected operating cash generation will fund anticipated needs for at least 12 months. It does not provide numerical earnings or revenue guidance, and stated that it may pursue further acquisitions.
- The company was evaluating the impact of recently enacted import tariffs; management did not expect a material impact but acknowledged uncertainty. It declared a $0.02-per-share quarterly dividend on June 7, payable July 15, 2019.
Risks, contingencies and other notable items
- Customer concentration remains significant: for the six months, two customers represented approximately 32% and 10% of sales. Customer agreements impose no minimum purchase obligations; a reduction or loss of orders could materially affect revenue and profits.
- Cash balances exceeded federal deposit insurance limits by approximately $11.7 million. Two vendors accounted for 14% and 13% of six-month inventory purchases.
- Inventory totaled $7.9 million; management notes that excess or obsolete inventory could require write-offs. Leases, including newly added C Enterprises facilities, are ongoing commitments.
- The company reported $90,000 of unrecognized tax benefits at April 30, 2019. It reported no material or non-ordinary-course legal proceedings and no material changes to previously disclosed risk factors.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied metadata says 2018 Q2, while the filing reports the quarter ended April 30, 2019.
- Assess whether the sales and margin declines reflect exceptional prior-year orders, ongoing demand changes, or the cost structure of Custom Cabling, including outsourcing.
- Track conversion of the $10 million backlog into shipments and cash, including the effect of customer cancellations and concentrated customer exposure.
- Review C Enterprises’ subsequent contribution to sales and profitability, acquisition-related costs, and assumed liabilities.
- Monitor working-capital needs, receivables collection, inventory levels, tariff effects, and the company’s capacity to maintain dividends while considering further acquisitions.