RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2022; filed June 14, 2022. The request metadata says “2021 Q2,” but the filing itself reports fiscal 2022 Q2. Financial amounts below are in U.S. dollars; unless otherwise noted, amounts are in millions.
Business context
RF Industries manufactures and markets RF interconnect products, cable assemblies, custom cabling, wiring harnesses, and wireless infrastructure products. It reports two segments: RF Connector and Custom Cabling. Microlab, acquired March 1, 2022, was added to the RF Connector segment and contributed results for approximately two months of the quarter.
Financial performance
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales, 2022 | $21.5 | $38.4 |
| Net sales, 2021 | $11.1 | $21.1 |
| Gross profit, 2022 | $6.1 | $10.2 |
| Gross margin, 2022 | 28.3% | 26.5% |
| Operating income, 2022 | $0.7 | $0.4 |
| Net income, 2022 | $0.5 | $0.2 |
| Diluted EPS, 2022 | $0.05 | $0.02 |
Quarterly sales rose 94% year over year; six-month sales rose 82%. Six-month gross profit increased, but gross margin declined from 35.0% to 26.5%. The company reported operating cash outflow of $1.6 million for the six months, versus $1.4 million in the prior-year period. Investing cash outflow was $24.5 million, including $24.2 million for Microlab, and financing provided $16.8 million, primarily from the term loan. Cash declined $9.3 million to $3.8 million.
At April 30, 2022, current assets were $41.6 million and current liabilities were $14.6 million; management reported working capital of approximately $27 million and a current ratio of about 3:1. Total liabilities were $29.5 million, including $16.8 million outstanding under the term loan. The company had not drawn on its $3.0 million revolving facility. Stockholders’ equity was $40.2 million.
Material changes versus the prior comparable period
- Microlab was acquired for $24.25 million in cash. The preliminary purchase allocation included $13.84 million of intangible assets and $4.99 million of goodwill; allocation remains subject to adjustment.
- Quarterly Custom Cabling sales increased $6.5 million, primarily from wireless-carrier demand for hybrid fiber optic cable; RF Connector sales rose $3.9 million, including $3.4 million attributed to Microlab. For the six-month period, Custom Cabling sales increased $13.1 million and RF Connector sales increased $4.3 million.
- Net income fell from $4.8 million to $0.5 million for the quarter and from $4.4 million to $0.2 million for six months. Prior-year results benefited from the Employee Retention Credit (ERC), which reduced labor costs, and $2.8 million of PPP loan and interest forgiveness recorded as other income. The filing states that, excluding the ERC benefit, prior-year quarterly gross margin would have been 27.1% and six-month gross margin 26.6%.
- Operating expenses increased, reflecting Microlab costs and acquisition-related and other one-time charges: approximately $0.6 million in the quarter and $1.4 million for six months. Six-month selling and general expenses also included Microlab costs.
- Inventory increased to $19.2 million from $11.2 million at October 31, 2021; cash fell from $13.1 million to $3.8 million. Goodwill and intangible assets rose substantially following the acquisition.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided. Management believes cash, available revolving credit, expected operating cash flow, and backlog are sufficient for liquidity needs over the next 12 months.
- Backlog was $27.6 million at April 30, 2022, down from $33.3 million at October 31, 2021. Orders may be cancelled, and management notes that order timing limits forecasting.
- COVID-19 intermittently affected staffing and customer operations, with some customers delaying or deferring orders. The filing also identifies inflation in energy and raw-material costs, supply-chain and global economic uncertainty, and the Russia-Ukraine conflict as risks.
- Customer concentration is significant: one wireless-carrier customer represented 28% of six-month sales and 21% of net receivables. The company warns that customers have no minimum purchase obligations. One vendor accounted for 32% of six-month inventory purchases.
- The credit facility is secured and includes financial covenants, including maximum consolidated debt-to-EBITDA of 3.00:1 and minimum fixed-charge coverage of 1.25:1. Verify covenant compliance; the filing excerpt does not provide the company’s covenant calculations.
- The company held a $1.7 million ERC receivable in other current assets at quarter-end. Management reported no material non-ordinary-course legal proceedings and no goodwill or indefinite-lived intangible impairment indicators at April 30, 2022, while noting impairment could arise as economic effects become clearer.
- Disclosure controls were assessed as effective. The company was integrating Microlab’s policies, processes, technology, and operations.
Investor verification points
- Confirm Microlab’s post-acquisition contribution, integration progress, and final purchase-price allocation.
- Assess whether operating cash flow improves as inventory and other working-capital requirements normalize.
- Monitor gross margins, including the effects of product mix, pricing, inflation, and the absence of prior-year ERC benefits.
- Track customer and vendor concentration, backlog conversion, and any order delays or cancellations.
- Verify term-loan covenant compliance, debt repayment requirements, and liquidity under changing operating conditions.
- Check collection timing and recoverability of the $1.7 million ERC receivable and the potential effects of acquisition-related intangible amortization.