RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended April 30, 2015. Although the request metadata says “2014 Q2,” the filing itself reports fiscal 2015 second-quarter results.
Business context
RF Industries designs, manufactures and markets interconnect products and systems, including coaxial, specialty and fiber-optic cables and connectors. Its three reported segments are RF Connector and Cable Assembly, Custom Cabling Manufacturing and Assembly, and Medical Cabling and Interconnector. Fiscal 2015 results include Comnet, acquired effective for accounting purposes November 1, 2014.
Financial results
| Metric | Three months ended April 30, 2015 | Six months ended April 30, 2015 |
|---|---|---|
| Net sales | $8.076 million, up 40% year over year | $14.969 million, up 29% |
| Gross profit / margin | $3.069 million / 38%, versus $2.752 million / 48% | $5.569 million / 37%, versus $5.334 million / 46% |
| Operating income | $723,000, versus $763,000 | $749,000, versus $1.102 million |
| Net income | $448,000, versus $478,000 | $514,000, versus $742,000 |
| Diluted EPS | $0.05, versus $0.05 | $0.06, versus $0.08 |
| Operating cash flow | Six-month use of $784,000, versus $2.0 million provided in the prior-year period |
Comnet contributed $2.8 million of quarterly sales and $5.0 million for the six months. Excluding Comnet, sales from the other divisions declined year over year. Management attributed lower gross margins principally to reduced higher-margin Optiflex sales, fixed manufacturing costs spread over lower volume, and Comnet’s historically lower-margin business mix.
Financial position and liquidity
- At April 30, 2015, cash and equivalents were $10.393 million, down from $14.718 million at October 31, 2014. Current assets were $21.134 million and current liabilities $3.316 million; management reported working capital of $17.8 million and a current ratio of about 6.4:1.
- Total liabilities were $4.445 million. The company reported no outstanding borrowings and had an undrawn $5.0 million line of credit, with principal due June 30, 2016.
- Six-month investing cash use was $2.373 million, including $2.249 million for Comnet net of cash acquired. Financing cash use was $1.168 million, including $1.174 million of dividends.
- Management believed available current assets, expected operating cash generation and the credit line would fund needs for at least 12 months. Subsequent acquisition payments reduced cash by $0.7 million in May and $2.1 million in June.
Changes, outlook and risks
- Comnet’s acquisition increased Custom Cabling segment sales, but did not prevent six-month operating income and net income from falling. The purchase-price allocation was preliminary; recorded goodwill was $2.311 million. The acquisition included $3.090 million cash, $1.060 million in shares and a $645,000 estimated earn-out; additional earn-out payments of up to $1.360 million were possible under the agreement.
- On May 19, 2015, the company bought the Comp Pro product line for $700,000 cash. On June 5, it acquired Rel-Tech for up to $3.1 million, including cash, shares and contingent earn-outs. These transactions occurred after the reporting period.
- Management gave no specific revenue or earnings guidance. It expected Comnet to lower aggregate gross margins and identified potential future acquisitions as a possible use of cash.
- Customer concentration is material: one customer accounted for 25% of six-month sales and 28% of receivables at April 30. The filing warns that reduced orders or loss of this customer could significantly affect revenue and profit. About $9.6 million of cash was above federally insured limits.
- A former employee’s federal lawsuit alleging retaliation and wrongful termination remained pending; the company disputed the claims and reported that its insurer had appointed defense counsel. The earlier OSHA complaint had been withdrawn.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the applicable reporting period: the filing is for fiscal 2015 Q2, not 2014 Q2.
- Assess whether Comnet and subsequent acquisitions can sustain sales while improving or further diluting margins, and review the preliminary purchase accounting and earn-out obligations.
- Track cash conversion, receivables collection, post-acquisition liquidity and the use of dividends or the credit line.
- Monitor the concentrated customer relationship and the pending employment-related litigation.
- Reconcile the share-repurchase totals: the notes report 22,828 shares repurchased, while MD&A reports 28,828.