RF Industries, Ltd. — Form 10-Q Summary
Period clarification: The filing is for the quarter ended July 31, 2011 (fiscal 2011 Q3), not 2010 Q3 as stated in the request metadata. Comparative figures are for the three and nine months ended July 31, 2010.
Business context
RF Industries makes connectors, cable assemblies and related products for multiple markets. On June 15, 2011, it acquired Cables Unlimited, a custom fiber-optic cable manufacturer, for $5.6 million: $2.8 million cash and $2.8 million in 762,738 newly issued shares. Cables Unlimited contributed approximately $909,000 of revenue after acquisition during the quarter. Its purchase-price allocation was preliminary.
Financial performance
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Nine months ended July 31, 2011 | Nine months ended July 31, 2010 |
|---|---|---|---|---|
| Net sales | $4.95 million | $4.23 million | $13.48 million | $11.32 million |
| Gross profit / margin | $2.42 million / 48.8% | $2.02 million / 47.7% | $6.82 million / 50.6% | $5.60 million / 49.5% |
| Operating income | $125 | $443,534 | $1.15 million | $1.24 million |
| Consolidated net income | $64,694 | $312,270 | $822,699 | $785,337 |
| Basic / diluted EPS | $0.01 / $0.01 | $0.05 / $0.05 | $0.13 / $0.12 | $0.14 / $0.12 |
| Cash flow from operations | Not presented for the quarter | $(380,267) | $2.08 million |
Quarterly sales rose 17%, including Cables Unlimited; excluding the acquired business, sales fell, principally due to weakness in RF connectors/cable assemblies and medical cabling. Nine-month sales rose 19%, supported by growth across existing segments as well as the acquisition. Despite higher sales and gross profit, quarterly operating income was nearly zero, mainly because of approximately $503,000 in acquisition-related and other one-time selling and general costs. Nine-month operating income declined about 7%, while net income increased modestly, aided by lower income taxes.
Liquidity, assets and debt
- At July 31, 2011, cash and cash equivalents were $1.17 million; certificates of deposit totaled approximately $6.27 million. Cash was down from $4.73 million at October 31, 2010.
- Current assets were $16.45 million and current liabilities $4.16 million, yielding working capital of $12.29 million and a current ratio of approximately 4:1.
- Operating cash outflow of $380,267 reflected, among other items, increased inventory purchases and other current assets, partly offset by receivable collections. Investing cash outflow was $3.82 million, including the $2.8 million cash acquisition payment and net certificate-of-deposit purchases.
- Consolidated liabilities included $1.40 million of K&K mortgage debt, with $38,090 current and $1.37 million long-term. Cables Unlimited guarantees the VIE’s mortgage obligations; the filing states the former owner agreed to release that guarantee. The company reported no commercial bank credit facility.
- Inventory increased 37% to $6.30 million from October 31, 2010. Management attributed the increase to higher purchases for volume discounts, sales growth and inventory acquired with Cables Unlimited.
Changes, outlook and risks
- The board declared a $0.25-per-share special dividend, paid September 1, 2011, and a $0.05-per-share quarterly dividend payable October 17, 2011. Management said the dividends were not expected to materially affect liquidity or capital resources. The special dividend totaled approximately $1.78 million.
- Management said existing current assets and expected operating cash generation should fund anticipated needs for at least one year, while noting there is no existing bank credit arrangement. No quantified earnings or revenue guidance was provided.
- Management anticipated increased RF Wireless sales after a transceiver completed FCC testing and entered commercial production. It also expected Cables Unlimited’s approximately 37% gross margin to weigh on overall margins, and forecast lower selling and general expense after acquisition-related one-time costs, though the acquired business increases the ongoing expense base.
- Near-term cable and connector sales faced uncertainty related to the proposed AT&T/T-Mobile merger and customer purchase deferrals. One customer represented 18% of nine-month sales and had no minimum-purchase commitment. Foreign sales fell year over year; the filing also identifies vendor concentration in inventory purchases.
- Tax benefits were unusually favorable: the nine-month provision included approximately $34,000 of research-credit benefits, a $137,000 benefit from expired uncertain-tax-position statutes, and approximately $73,000 of state tax refunds. Management estimated a 47% annual effective tax rate before the described nonrecurring adjustments.
- Management reported no goodwill impairment indicators at July 31, 2011. Acquisition-related goodwill was $2.64 million and was not expected to be tax deductible. The filing identifies inventory valuation, receivable allowances and goodwill impairment as judgment-sensitive accounting areas.
- Disclosure controls were concluded effective as of July 31, 2011; no material change in internal control over financial reporting was reported. No legal proceedings were reported.
Important facts for investors to verify
- Reconcile the request’s “2010 Q3” label with the filing’s actual 2011 quarter and confirm the appropriate comparison period.
- Review the final Cables Unlimited purchase-price allocation, acquired business performance, and progress on releasing its mortgage guarantee.
- Assess cash and liquidity after the special dividend and the outstanding quarterly dividend, including the impact of continued inventory investment and negative operating cash flow.
- Monitor sales and profitability excluding Cables Unlimited, the major customer’s orders, and the effect of industry conditions and foreign-market demand.
- Distinguish recurring earnings from acquisition costs and one-time tax benefits when assessing the quarter’s near-break-even operating result and reported net income.