RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2024; comparisons are with the periods ended April 30, 2023. The filing is for fiscal 2024, notwithstanding the request metadata’s “2023 Q2.” RF Industries manufactures and markets interconnect products and systems through its RF Connector and Custom Cabling segments. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Three months 2024 | Three months 2023 | Six months 2024 | Six months 2023 |
|---|---|---|---|---|
| Net sales | $16.11 | $22.30 | $29.57 | $40.64 |
| Gross profit | $4.82 | $6.12 | $8.13 | $11.21 |
| Gross margin | 29.9% | 27.4% | 27.5% | 27.6% |
| Operating income (loss) | $(0.42) | $0.49 | $(2.50) | $(0.68) |
| Net income (loss) | $(4.29) | $0.58 | $(5.66) | $(0.58) |
| Diluted EPS | $(0.41) | $0.06 | $(0.54) | $(0.06) |
Quarterly revenue fell 27.8% year over year; six-month revenue declined 27.1%. The six-month gross margin was essentially flat year over year, while quarterly margin improved. The six-month operating loss widened. Net loss was substantially affected by income tax provisions of $3.65 million for the quarter and $2.82 million for the six months. The company recorded a $3.526 million valuation allowance against deferred tax assets, citing recent losses and concluding that realization of all deferred tax assets was not more likely than not.
Cash flow, liquidity and debt
- Operating cash flow was positive $1.04 million for the six months, versus $2.22 million a year earlier. Investing activities used $0.31 million, mainly capital expenditures; financing activities used $4.22 million. Cash declined by $3.50 million to $1.40 million from $4.90 million at October 31, 2023.
- At April 30, current assets were $30.23 million and current liabilities $19.26 million, yielding reported working capital of $10.9 million and a current ratio of about 1.6:1. Inventory was $16.38 million, down from $18.73 million at fiscal year-end.
- The company repaid its Bank of America facilities after entering a new senior secured facility with Eclipse Business Capital (EBC) on March 15, 2024. At period-end, EBC borrowings were $10.46 million, classified as current. The facilities provide for up to $15 million in revolving loans and a separate $1 million additional line, subject to borrowing-base availability and reserves; actual undrawn availability is not stated clearly in the filing.
- EBC revolving borrowings generally bear interest at adjusted one-month SOFR plus 5.00%; the additional line bears adjusted SOFR plus 6.50%. Covenants include minimum excess availability, subject to a fixed-charge coverage exception, and a $2.5 million annual capital-expenditure limit.
- Operating lease liabilities totaled $20.20 million, including $1.42 million current. The company states that cash plus availability under the EBC revolving facility should cover anticipated liquidity needs, while also noting its operating losses and the need for future profitable operations and sufficient cash generation.
Material changes and management commentary
- Quarterly Custom Cabling sales fell 36.1% to $6.21 million, primarily from lower hybrid-fiber-cable sales to wireless customers. RF Connector sales fell 21.4% to $9.90 million, reflecting distributor inventory levels, lower carrier capital spending and fewer projects using approved RF components.
- For the six months, RF Connector sales declined 23.0% to $18.71 million and Custom Cabling sales declined 33.1% to $10.86 million. Custom Cabling generated $0.09 million pretax income, while RF Connector recorded a $2.39 million pretax loss.
- Management attributed quarterly gross-margin improvement to facility consolidation, cost-reduction initiatives and product mix. Engineering and selling/general expenses declined, reflecting headcount and other savings, lower commissions and bonuses, and reduced office and IT costs. Selling/general expense included one-time charges of about $0.1 million for consulting and severance in the quarter and $0.2 million for consulting, severance and inventory appraisal over six months.
- Management reported backlog of $18.0 million at April 30, up from $16.1 million at October 31, 2023, but cautioned that orders are difficult to predict and may be cancelled. It reported no customer representing at least 10% of current-period sales, though one wireless carrier and one distributor represented 15% and 10% of receivables, respectively.
- The filing provides no quantitative earnings or revenue guidance. Management plans continued cost reductions, facility consolidation, operational improvements and organic growth; it also may pursue acquisitions.
Risks, contingencies and unusual items
- Debt repayment, covenant compliance, borrowing-base availability, variable interest expense and the EBC lender’s secured position create liquidity and refinancing risks. An event of default could permit acceleration and could adversely affect the company’s ability to continue as a going concern.
- The company identifies recent losses and the need for profitable operations and sufficient operating cash flow as relevant to its going-concern assessment. It states its current cash and anticipated EBC availability should meet expected needs, but does not disclose a clear period-end unused borrowing amount.
- Customer purchase agreements generally lack minimum-purchase obligations. Order reductions, delays, cancellations or customer losses could materially reduce revenue and profits. Custom Cabling revenue is particularly dependent on larger orders.
- Inventory obsolescence or excess stock could require write-offs. The company also identifies impairment of goodwill and intangible assets as a risk requiring estimates of future cash flows.
- No material litigation outside the ordinary course was reported. No dividends were paid in the periods presented. Disclosure controls were deemed effective at a reasonable assurance level; the company reported changes to internal controls in connection with monitoring and administering the EBC facility.
Important facts for investors to verify
- Actual EBC borrowing availability, borrowing-base reserves, interest expense and covenant compliance after period-end.
- Whether revenue stabilizes and whether facility consolidation and cost reductions improve operating results and cash generation.
- The sustainability and order composition of the $18.0 million backlog, including cancellation exposure and wireless-carrier demand.
- The assumptions supporting the $3.526 million deferred-tax-asset valuation allowance and the effect of future results on tax expense.
- Inventory quality and the potential for further impairments or write-offs, as well as the company’s ability to meet lease and debt obligations.