RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2020. Although the request metadata says “2019 Q2,” the filing is for fiscal 2020 Q2. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context
RF Industries manufactures and markets interconnect products and systems, including cables, connectors, wiring harnesses, cooling systems and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. Schrofftech, acquired in November 2019, is included in current-period results; C Enterprises is also included, but was only partly included in the comparable 2019 quarter.
Key financial results
| Metric | Three months ended April 30, 2020 | Three months ended April 30, 2019 | Six months ended April 30, 2020 | Six months ended April 30, 2019 |
|---|---|---|---|---|
| Net sales | $10.39m | $13.63m | $22.80m | $24.27m |
| Gross profit / margin | $2.59m / 24.9% | $4.09m / 30.0% | $5.84m / 25.6% | $7.24m / 29.8% |
| Operating income (loss) | ($0.19m) | $1.36m | ($0.19m) | $2.15m |
| Net income (loss) | ($0.18m) | $1.06m | ($0.16m) | $1.70m |
| Diluted EPS | ($0.02) | $0.11 | ($0.02) | $0.17 |
For the six months, operating cash flow was $5.47m, investing cash flow was ($3.96m), and financing cash flow was $0.04m, producing a $1.54m increase in cash. Operating cash flow benefited substantially from $7.50m of collections of receivables outstanding at October 31, 2019. Investing outflows included $3.90m for Schrofftech; capital expenditures were $0.06m.
At April 30, 2020, cash was $14.08m, working capital was $23.5m, and the current ratio was approximately 5.1:1. Current assets were $29.25m and current liabilities were $5.74m. Total liabilities were $7.72m, including operating lease liabilities and the Schrofftech earn-out; no amounts were drawn on the $5.0m revolving credit facility. The company reported $31.69m of stockholders’ equity.
Material changes and segment performance
- Quarterly sales fell 24% year over year, while six-month sales declined 6%. Management attributed the weakness primarily to reduced project-based Custom Cabling demand amid slower carrier spending and COVID-19 disruption.
- Quarterly Custom Cabling sales declined 36% to $6.62m; its pretax loss was $0.89m. RF Connector sales rose 15% to $3.77m, with pretax income of $0.70m. For the six months, Custom Cabling recorded a $1.17m pretax loss, while RF Connector generated $0.98m of pretax income.
- Gross margin contracted in both periods, reflecting lower production-cost absorption on weaker project sales, product mix, and the lower margins of C Enterprises. Operating expenses increased year over year for the six-month period, partly due to acquired businesses, amortization, and stock compensation.
- Schrofftech contributed $1.1m of quarterly revenue and a $95,000 pretax loss; for the six months it contributed $2.3m of revenue and a $13,000 pretax loss. Its acquisition also added $3.30m of intangible assets and $1.36m of goodwill. The earn-out liability was reduced to $0.87m at April 30 from $1.25m at January 31, with the valuation decrease recorded in selling and general expenses.
- Cash increased despite the loss, principally because of receivable collections. Accounts receivable declined from $12.19m at October 31 to $4.95m at April 30; inventory increased to $9.10m from $8.25m.
Outlook, risks and unusual items
- Management expected the economic slowdown and resulting sales decline to continue through the remainder of 2020. The filing provides no quantified revenue or earnings guidance.
- The company said existing assets, expected operating cash generation and PPP funds should cover anticipated needs for at least 12 months, while noting uncertainty from COVID-19. Backlog was $5.7m at April 30, down from $6.1m at October 31, and orders may be cancelled.
- On May 5, 2020, after quarter-end, the company received approximately $2.8m in Paycheck Protection Program loans. Proceeds were intended for payroll, benefits, rent and utilities; management anticipated most would qualify for forgiveness. Any unforgiven balance has a two-year term, 1% interest and payments deferred for six months.
- COVID-19 caused partial facility shutdowns, reduced staffing and customer/vendor disruption, particularly at Cables Unlimited in Long Island, New York. Management identified possible further demand, cost and collections impacts, and said future goodwill impairment cannot be ruled out, though no impairment indicators were identified at April 30.
- Two distributors represented 11% and 17% of quarterly sales; the same customers represented 14% and 19% of receivables at quarter-end. Customer agreements have no minimum-purchase obligations. Cash exceeding federal deposit insurance limits was approximately $12.5m.
- The company paid $0.02 per share in dividends during each quarter; six-month dividends totaled $0.39m. The filing reports no material proceedings outside the ordinary course. Disclosure controls were assessed as effective; integration of Schrofftech controls was ongoing.
Important facts for investors to verify
- Whether carrier spending and COVID-related operating constraints continued to depress Custom Cabling sales, margins and collections after April 30.
- The use, forgiveness status and remaining balance of the $2.8m PPP loans, and any effect on liquidity or workforce levels.
- Schrofftech’s operating performance, earn-out assumptions and potential future contingent-consideration expense or payment, up to $2.4m under the purchase agreement.
- Customer concentration, the cancellability of orders and the conversion of the $5.7m backlog into revenue.
- Liquidity assumptions and compliance with covenants on the undrawn $5.0m credit line, as well as exposure to goodwill, intangible-asset and inventory impairment.