RF Industries, Ltd. — Form 10-Q Summary
Business context and reporting period
For the three months ended January 31, 2018 (fiscal first quarter 2018), compared with the three months ended January 31, 2017. RF Industries manufactures and markets interconnect products and systems through its RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly segments. Unless noted, financial amounts below are in millions.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $10.341 | $6.617; up 56% |
| Gross profit / margin | $3.073 / 30% | $1.857 / 28% |
| Operating income (loss) | $0.554 | $(0.359) |
| Net income (loss) | $0.454 | $(0.194) |
| Diluted EPS | $0.05 | $(0.02) |
| Cash from operating activities | $(0.152) | $(0.699) |
| Cash and cash equivalents at period end | $5.880 | $6.039 at October 31, 2017 |
| Current assets / current liabilities | $18.829 / $4.894 | Working capital $13.9; current ratio approximately 3.8 |
| Borrowings | No outstanding debt | — |
Custom Cabling sales rose 89% to $7.711 million, representing 75% of total sales; RF Connector and Cable Assembly sales increased 4% to $2.630 million. The filing attributes improved gross margin primarily to higher Custom Cabling revenue. Selling and general expense increased to $2.193 million, but fell to 21% of sales from 30% a year earlier. Engineering expense rose to $0.326 million from $0.224 million.
Operating cash use reflected growth in accounts receivable (up $1.494 million) and inventory (up $0.688 million), partly offset by higher accounts payable and accrued expenses. Investing activities provided $0.012 million; financing activities used $0.019 million, including $0.176 million of dividends. Cash declined $0.159 million during the quarter.
Material changes and unusual items
- Net income improved from a loss to profit, alongside higher sales and gross margin.
- The prior-year quarter included $0.044 million of discontinued-operations income, primarily RadioMobile royalties and proceeds related to the closed Bioconnect division; there was none in Q1 2018.
- The Tax Cuts and Jobs Act lowered the federal corporate tax rate to 21% effective January 1, 2018. The company reduced its deferred tax liability by $0.041 million. Its Q1 effective tax rate was 18%, versus 30% in the prior-year quarter. The filing says the tax analysis remains subject to refinement through December 22, 2018.
- Adoption of stock-compensation guidance produced a $0.019 million tax windfall benefit and a 3.5 percentage-point lower effective tax rate than without that provision.
Outlook, risks and contingencies
Management reported backlog of $20.2 million at January 31, 2018, up from $4.0 million at October 31, 2017. It expected a substantial portion to ship in the quarter ending April 30, 2018, with most of the remainder filled by fiscal year-end. Management believes existing assets and anticipated operating cash flows will fund needs for at least 12 months; it does not provide formal earnings or revenue guidance. Results for this quarter are not necessarily indicative of full-year results.
- Customer concentration: one customer generated approximately 36% of quarterly sales and represented 32% of accounts receivable. Customer agreements have no minimum purchase commitments.
- Supplier concentration: one vendor accounted for 23% of inventory purchases during the quarter.
- Cash concentration: approximately $5.3 million of cash exceeded federally insured limits.
- Inventory was $6.797 million; management identifies obsolescence and excess inventory as potential sources of write-offs.
- The $0.206 million earn-out liability is a Level 3 fair-value estimate; changes in assumptions or actual results could affect future expense. Rel-Tech earn-out payments may total up to $0.8 million through May 31, 2018.
- No material or non-ordinary-course legal proceeding was reported. The company said risk factors were materially unchanged from its 2017 Form 10-K; it reported no market-risk disclosures for the quarter.
The board declared a $0.02-per-share quarterly dividend on March 8, 2018, payable April 15, 2018 to holders of record March 31, 2018. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $20.2 million backlog converts to shipments and cash on management’s stated timetable.
- How much of sales, receivables and future growth depends on the largest customer, and whether customer orders remain stable.
- Whether receivables and inventory growth normalize without increasing collection delays or obsolescence risk.
- Any final adjustments to the Tax Act accounting and the amount and timing of earn-out payments.
- The sustainability of the improved margins and earnings, given the quarter’s working-capital cash use and reliance on concentrated customers and suppliers.