RF Industries, Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2012. The request metadata says “2011 Q4,” but the filing covers fiscal 2012 and compares with fiscal 2011.
Business context
RF Industries designs, manufactures and markets interconnect products, specialty cables and wireless systems through four reportable segments: RF Connector and Cable Assembly, Cables Unlimited, Medical Cabling and Interconnector, and RF Wireless. Cables Unlimited was acquired in June 2011. The company reported its 19th consecutive profitable year.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $30.23 million | $19.43 million |
| Gross profit / margin | $13.23 million / 44% | $9.34 million / 48% |
| Operating income | $4.08 million | $1.14 million |
| Net income | $2.61 million | $0.77 million |
| Diluted EPS | $0.34 | $0.11 |
| Operating cash flow | $2.33 million | $0.12 million |
- Sales rose 56%, principally because Cables Unlimited contributed $10.91 million for a full year, versus $2.64 million after its partial-year inclusion in FY2011. Sales also increased in the other three segments.
- Gross margin declined four percentage points, primarily because Cables Unlimited had lower margins. Selling and general expense was $8.02 million, or 27% of sales, compared with $6.95 million, or 36%.
- Income tax expense was $1.50 million; the effective tax rate increased to 36.5% from 32.9%, partly because the research and development tax credit expired.
- At year-end, cash and certificates of deposit totaled $5.49 million, working capital was $14.90 million, and total assets were $25.46 million. Stockholders’ equity was $20.23 million.
- There was no mortgage payable at October 31, 2012; the prior-year balance related to the Cables Unlimited property financing, which was refinanced and led to deconsolidation of the related variable interest entity. The company reported no commercial bank loan or credit facility.
- Operating cash flow was below net income, mainly reflecting a $2.58 million increase in receivables and $0.79 million used for additional inventory. Investing cash flow was positive $3.50 million, largely from certificates of deposit maturing; capital expenditures were $0.59 million.
Material changes and operating developments
- Cables Unlimited generated $10.91 million, approximately 36% of FY2012 sales; the RF Connector and Cable Assembly segment generated $14.18 million, approximately 47%.
- OptiFlex, a hybrid power and communications cable for wireless network upgrades, generated approximately $5.57 million, or 18% of total sales, through one customer. The filing also says OptiFlex represented approximately 50% of Cables Unlimited revenue.
- RadioMobile’s $2.6 million Los Angeles County Fire Department upgrade contract contributed approximately $1.6 million of revenue in FY2012. The remaining contract revenue was expected in the first calendar quarter of 2013.
- Foreign sales fell to $1.61 million, about 5% of sales, from $2.10 million, about 11%.
- Cash dividends were $1.39 million, or $0.20 per share, in FY2012. The board approved a further $0.10-per-share dividend for December 2012. The company repurchased 324,871 shares for $1.14 million.
Outlook, risks and unusual items
- Management expected current assets and cash generated from operations to fund anticipated needs through FY2013; this is not a quantified earnings or revenue forecast. Management also cited resources for operations and potential acquisitions over at least the next 12 months, while noting there was no existing credit facility and borrowing availability was not assured.
- Key risks include customer concentration: one customer accounted for 33% of sales and 49% of year-end receivables. The customer has no minimum-purchase obligation. The filing identifies dependence on the RF Connector and Cable Assembly and Cables Unlimited segments, which together represented about 83% of sales.
- Supply-chain exposure is material. Most RF connectors are made by third parties, the company has no manufacturing agreements with those suppliers, and OptiFlex depends on a third-party bundler and a single-source fiber-optic cable supply.
- The company received a $725,000 demand from a former employee’s attorney alleging wrongful termination. The company disputes the claim and notified its employment-practices insurer; the filing does not establish the ultimate outcome or exposure.
- On January 18, 2013, James Doss stepped down as CFO; CEO Howard Hill became interim CFO while the company searched for a replacement. Hill’s employment agreement was due to expire July 31, 2013.
- The company reported effective disclosure controls and internal control over financial reporting. The independent auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the major customer and OptiFlex orders continued after year-end, given the lack of minimum-purchase commitments and the concentration of sales and receivables.
- Completion, remaining revenue, costs and cash collection for the Los Angeles County contract, and whether the expected first-quarter 2013 timing was achieved.
- OptiFlex’s ongoing margins and the availability and delivery performance of its third-party bundler and single-source fiber-optic supplier.
- Receivables collection, inventory quality and the sustainability of operating cash flow following the FY2012 increases in receivables and inventory.
- Resolution and insurance coverage of the former employee’s $725,000 demand; the filing does not provide a clear estimate of any potential loss.
- Financial statements show basic and diluted EPS of $0.38 and $0.34, respectively; reconcile these figures with net income attributable to RF Industries of $2.61 million and the share counts disclosed in the filing.