RF Industries, Ltd. — Form 10-Q Summary
Business context and period. This filing covers the three months ended January 31, 2012, the company’s fiscal first quarter, and compares results with the three months ended January 31, 2011. RF Industries sells connectors, cable assemblies, medical cabling and wireless products. Results include Cables Unlimited, acquired in June 2011, for the full current quarter; the prior-year comparison does not include that business.
Financial performance and position
- Revenue: $5.56 million, up 34% from $4.14 million. Cables Unlimited contributed $1.44 million; Medical Cabling and Interconnector sales rose 11% to $674,000, and RF Wireless sales rose 170% to $337,000.
- Profit and margins: Gross profit was $2.50 million, up from $2.17 million, but gross margin fell to about 45% from 52%. Operating income decreased to $201,000 from $528,000. Consolidated net income was $117,000, or $0.02 per basic and diluted share, versus $351,000, or $0.06 basic and $0.05 diluted per share. Net margin was about 2% versus 8%.
- Costs and taxes: Selling and general expense increased 49% to $2.01 million, reflecting the acquired business, higher salaries, stock-option expense and remaining acquisition-related professional fees. The effective tax rate was about 47%, compared with 35%; the filing cites nondeductible incentive stock-option compensation and a prior-year, approximately $34,000 research-credit benefit.
- Cash flow: Operating activities provided $95,000, compared with $120,000 used in the prior-year quarter. Investing activities provided $808,000, mainly from certificate-of-deposit maturities, partly offset by $192,000 of capital expenditures. Financing activities used $1.07 million, including $787,000 for share repurchases and $353,000 of dividends. Cash declined $164,000 to $1.60 million.
- Liquidity and debt: At January 31, cash and equivalents were $1.60 million and certificates of deposit were $3.09 million. Current assets were $15.77 million and current liabilities $2.47 million; reported working capital was $13.31 million and the current ratio about 6:1. The company reported no outstanding indebtedness. Management said current assets and expected operating cash flows should fund needs for at least 12 months, while noting it had no commercial credit facility.
- Balance sheet and capital returns: Total assets were $22.23 million, down from $24.38 million at October 31, 2011. The company repurchased 232,477 shares for $787,243 and paid $0.05 per share in dividends during the quarter. A further $0.05-per-share dividend was declared March 8, payable April 16, 2012.
Material changes and management commentary
- Revenue growth was driven chiefly by Cables Unlimited and partial fulfillment of a $2.6 million Los Angeles County Fire Department wireless-system contract awarded in November 2011. Management expected completion by the end of fiscal Q1 2013.
- RF Connector and Cable Assembly sales fell $303,000, partly because the prior-year quarter included a large order. Management cited higher raw-material and labor costs and said it had begun raising certain prices in February 2012. It expected raw-material price increases to continue during the year; the filing gives no quantified earnings outlook or formal guidance.
- Cables Unlimited’s gross margin was 37%, below the company’s historical overall margin. Management expected the acquired business’s sales to lower company-wide gross margins. Medical Cabling’s margin improved to 41% from 37%.
- On January 25, 2012, the company deconsolidated K&K Unlimited, LLC, a variable interest entity, after Cables Unlimited was released from guarantees following mortgage repayment/refinancing. Deconsolidation reduced reported assets by about $1.6 million and liabilities by about $1.4 million; management said it did not materially affect quarterly results.
Risks, contingencies and controls
- One customer represented approximately 14% of quarterly sales and 10% of receivables. Its agreements have no minimum-purchase obligations; reduced or canceled orders or loss of the customer could materially affect revenue and profit.
- Inventory was $6.28 million. Management identified inventory valuation, receivable allowances, goodwill and intangible-asset impairment, and stock-option valuation as areas involving significant estimates. The filing notes that inventory write-downs could affect net worth and future earnings.
- Foreign sales declined to $369,000, about 7% of sales, from $615,000, about 15%; management noted foreign orders can be comparatively large and fluctuate in timing.
- The filing reports no legal proceedings and no material change in internal control over financial reporting. Management concluded disclosure controls were effective as of January 31, 2012. Forward-looking statements are subject to uncertainty, and the company disclaimed an obligation to update them.
Important facts for investors to verify
- Whether the February 2012 price increases offset continued input-cost inflation and improve RF Connector and Cable Assembly margins.
- Progress, remaining costs, customer acceptance and cash-flow timing for the Los Angeles County contract, and the timing of Cables Unlimited integration benefits.
- Customer concentration and order trends, including the concentrated customer’s purchasing and payment behavior.
- Inventory quality and realizability, especially given the $6.28 million balance and volume purchases made to obtain vendor discounts.
- The sustainability of dividends and repurchases relative to operating cash generation and the absence of a committed credit facility.
- The cover page states common shares outstanding “as of March 15, 2011,” although the report was signed March 15, 2012; verify the intended date and the applicable share count.