RF Industries, Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2016. The request metadata says “2015 Q4,” but the supplied filing is the company’s 2016 annual report, with fiscal 2015 comparative figures.
Business context
RF Industries designs, manufactures and markets coaxial connectors, cable assemblies, fiber-optic products, wiring harnesses and data-center products. Its reporting segments are RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly. Fiscal 2016 included the full-year results of Comnet and Rel-Tech; Rel-Tech contributed for only part of fiscal 2015. The company sold Aviel in December 2015 and shut down its Bioconnect division in 2016, reporting Bioconnect as discontinued operations.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $30.241 million | $30.908 million |
| Gross profit / margin | $8.463 million / 28% | $10.462 million / 34% |
| Operating income (loss) | $(4.688) million | $0.799 million |
| Net income (loss) | $(4.089) million | $0.994 million |
| Basic and diluted EPS | $(0.47) | $0.12 basic; $0.11 diluted |
| Cash from (used in) operations | $(1.267) million | $0.168 million |
| Cash and cash equivalents at year-end | $5.258 million | $7.595 million |
| Working capital | $12.885 million | $15.296 million |
- Current assets were $16.793 million and current liabilities $3.908 million at year-end; the reported current ratio was approximately 4.3:1. The company had no borrowings outstanding.
- Total assets were $25.837 million and stockholders’ equity was $21.392 million, compared with $32.252 million and $26.371 million, respectively, in 2015.
- Investing activities provided $26,000 in 2016, including proceeds from the Aviel asset sale, offset by $384,000 of capital expenditures. Financing activities used $1.096 million, including $1.141 million of dividends.
- Net sales declined about 2% despite Rel-Tech’s contribution of $6.8 million, versus $3.1 million in fiscal 2015. Excluding Rel-Tech, sales from the other divisions declined $4.4 million, or 16%, according to management.
- RF Connector and Cable Assembly sales fell 20% to $9.352 million. Custom Cabling sales increased to $20.889 million, but Comnet sales declined 12% and Cables Unlimited sales declined 14%.
Material changes, outlook and risks
- Gross margin fell from 34% to 28%, reflecting weaker higher-margin connector and OptiFlex sales, fixed manufacturing costs spread over lower revenue, and increased inventory reserves. Management said aggregate margins were expected to remain below historical levels.
- The company recorded $2.844 million in non-cash impairment charges: $2.6 million against Cables Unlimited goodwill and $150,000 against its trademark. Cables Unlimited missed sales and revenue goals, experienced lower-margin product mix and faced reduced demand for cell-tower products.
- Other notable expenses included $256,000 of professional fees for an abandoned strategic transaction and $171,000 for a new ERP system. Management also cited acquisition, integration, disposition and closure-related costs. Inventory was reduced by about $900,000 from the prior year, with inventory write-downs of $168,000 reflected in cash-flow reconciliations.
- Management said cost reductions, including personnel changes and discontinued programs, were expected to lower fiscal 2017 selling and general expenses; it estimated savings in excess of $750,000 from personnel reductions and related expenses. These are expectations, not guaranteed results. Management believed available assets and expected operating cash flows would cover needs for at least 12 months after October 31, 2016.
- Dividends were reduced during fiscal 2016: total payments were $1.141 million, or $0.13 per share, versus $2.382 million, or $0.28 per share, in fiscal 2015. A $0.02-per-share dividend declared in December 2016 was paid in January 2017.
- Management concluded internal controls over financial reporting were ineffective at October 31, 2016 because of a material weakness involving timely review of the goodwill impairment analysis and other complex estimates. The resulting adjustment was recorded before the financial statements were issued; management planned additional review procedures. The auditor did not attest to internal-control effectiveness.
- Key risks include ongoing softness in wireless and broadband demand, reliance on third-party connector manufacturers without manufacturing agreements, competition, a major customer representing 15% of sales and 20% of receivables, and possible further goodwill impairment. Cash balances exceeding federal insurance limits were approximately $3.9 million.
- Howard Hill returned as unpaid interim CEO after Johnny Walker’s employment ended in October 2016. Management succession, execution of cost savings and the performance of acquired businesses remain relevant uncertainties. The filing reported no material legal proceedings.
Most important facts for investors to verify
- Whether sales, gross margin and operating cash flow stabilized after the fiscal 2016 declines, particularly at Cables Unlimited and the RF Connector business.
- Whether the projected fiscal 2017 cost savings were achieved without impairing revenue, customer service or operating capacity.
- Whether management remediated and tested the internal-control material weakness, and whether further impairment charges or financial-reporting delays arose.
- Whether the major customer and third-party suppliers maintained their relationships, and whether concentration or sourcing risks changed.
- Whether cash, working capital and dividends remained sustainable given operating cash use, acquisition-related obligations and the absence of a credit line.