RF Industries, Ltd. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018, compared with fiscal 2017. The filing is for FY2018, notwithstanding the request metadata’s “2017 Q4” label. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context
RF Industries designs, manufactures and markets interconnect products, including coaxial connectors and cable assemblies, custom copper and fiber-optic cabling, and wiring harnesses. Its continuing operations report two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. Demand for custom fiber-optic cabling used in wireless network upgrades was the primary growth driver.
On October 31, 2018, the company sold Comnet Telecom for $4.2 million cash. Comnet represented 14% of reported FY2018 company sales before its results were classified as discontinued operations; continuing-operations results exclude it.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Continuing net sales | $50.2 million | $23.0 million |
| Gross profit / margin | $17.1 million / 34.1% | $7.0 million / 30.4% |
| Operating income / margin | $7.4 million / 14.8% | $0.2 million / 0.9% |
| Income from continuing operations | $6.0 million | $0.2 million |
| Discontinued operations, net of tax | $(0.18) million | $0.21 million |
| Consolidated net income | $5.85 million | $0.38 million |
| Basic / diluted EPS | $0.64 / $0.61 | $0.04 / $0.04 |
- Continuing sales increased 118%. Custom Cabling sales rose 234% to $38.4 million; RF Connector sales increased 3% to $11.8 million. Custom Cabling generated 76% of continuing sales.
- Gross margin improved by 3.7 percentage points, which management attributed mainly to higher Custom Cabling volume spreading fixed manufacturing costs over more sales. Selling and general expense rose 37% to $8.2 million, but declined to about 16% of sales from 26%.
- Operating cash flow from continuing operations was $5.27 million, compared with $0.77 million in FY2017. The cash flow statement reports a $10.30 million increase in cash overall, including discontinued-operations cash flows and the Comnet sale proceeds.
- Cash and cash equivalents were $16.3 million, versus $5.2 million at FY2017-end; working capital was $23.8 million and the current ratio approximately 6:1. The company reported no borrowed-money debt. Total liabilities were $4.7 million.
- FY2018 cash generation was partly offset by increases in receivables ($1.36 million) and inventory ($1.57 million). Capital expenditures were $0.27 million; dividends paid totaled $0.73 million, or $0.08 per share.
Material changes, outlook and risks
- Backlog was $11 million at October 31, 2018, up from $4 million a year earlier. Management said current assets, expected operating cash generation and backlog should fund anticipated needs for at least 12 months. This is not a quantified earnings or revenue forecast; orders may be canceled, and management said future order trends are difficult to predict.
- Management described a “one-company” strategy to integrate facilities, sales and manufacturing, focus on custom manufacturing and passive products, and pursue targeted acquisitions. The Comnet sale was intended to streamline operations and align the business with that strategy.
- Comnet generated an FY2018 pretax operating profit of $0.575 million before a $0.796 million pretax loss on sale; discontinued operations overall reported a $0.18 million after-tax loss. Its sale was to an affiliate of Comnet’s founder and president.
- Customer concentration is significant: one distributor accounted for 62% of FY2018 sales, versus 27% in FY2017, and 48% of year-end receivables. Its agreement has no minimum purchase requirement. Wireless infrastructure spending and a few end customers also materially influence demand.
- Other risks include reliance on third-party connector manufacturers, including suppliers in Asia, and on distributors; one vendor represented 39% of FY2018 inventory purchases. The company had $15.4 million in cash above federally insured limits. Management was evaluating recently enacted import tariffs and did not expect a material impact, while acknowledging uncertainty.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% for FY2019; the company reported a 19.5% effective tax rate for FY2018. Management reported no goodwill impairment in FY2018. No material legal proceedings outside the ordinary course were reported.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor gave an unmodified opinion on the financial statements but did not attest to internal control effectiveness.
Most important facts to verify
- Whether the unusually high 62% distributor concentration and associated receivables exposure persisted after year-end.
- How much of the $11 million backlog converted to sales, and whether wireless carrier spending and end-customer orders continued.
- Whether FY2018 margins and cash generation were sustainable after the exceptional Custom Cabling growth and Comnet divestiture.
- The final transaction accounting and related-party terms for the $4.2 million Comnet sale, including the reported loss on sale.
- Any subsequent changes in supplier concentration, tariff costs, cash balances above insured limits, or dividend policy.