Business context and reporting period
RF Industries, Ltd. (NASDAQ: RFIL) manufactures and markets RF interconnect products, cable assemblies, custom cabling, and related wireless infrastructure solutions. This Form 10-Q covers the quarter and nine months ended July 31, 2022. The request metadata says “2021 Q3,” but the filing itself is for fiscal 2022 Q3.
The company reports two segments: RF Connector and Custom Cabling. Results include Microlab from its March 1, 2022 acquisition.
Financial performance and position
Amounts below are in millions, except per-share data and margins.
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | 2022: $23.8; 2021: $15.3 | 2022: $62.3; 2021: $36.3 |
| Gross profit / margin | 2022: $7.2 / 30.4%; 2021: $5.1 / 33.2% | 2022: $17.4 / 28.0%; 2021: $12.4 / 34.2% |
| Operating income | 2022: $1.1; 2021: $1.2 | 2022: $1.5; 2021: $3.3 |
| Net income / diluted EPS | 2022: $0.8 / $0.08; 2021: $0.9 / $0.09 | 2022: $1.0 / $0.10; 2021: $5.4 / $0.53 |
- Quarterly sales rose 56%; nine-month sales rose 72%. The acquisition contributed approximately $6.5 million to quarterly sales and $9.9 million to nine-month RF Connector sales.
- For the quarter, RF Connector sales were $10.5 million and Custom Cabling sales were $13.3 million. Nine-month segment sales were $21.9 million and $40.3 million, respectively.
- Operating cash flow was $0.6 million for the nine months, versus cash used of $3.6 million a year earlier. Inventory growth used $4.0 million of cash. Investing cash use was $24.9 million, including $24.4 million for Microlab and $0.4 million of capital expenditures.
- Cash was $5.1 million at July 31, 2022, down from $13.1 million at October 31, 2021. Working capital was $30.1 million and the current ratio was approximately 3:1.
- Term-loan borrowings were $16.2 million; the $3.0 million revolving facility was undrawn. Operating lease liabilities totaled $16.8 million. Total liabilities were $46.0 million and stockholders’ equity was $41.2 million.
Material changes and unusual items
- Microlab was acquired for total consideration of $24.5 million, funded with the $17.0 million term loan and cash on hand. The preliminary allocation included $13.8 million of intangible assets and $5.2 million of goodwill; purchase accounting remains preliminary. Acquisition-related costs were approximately $1.3 million through July 31.
- Prior-year results benefited from employee retention credits (ERC). Management estimates that excluding ERC, prior-year quarterly gross margin would have been 27.7% and nine-month gross margin 27.0%, compared with 30.4% and 28.0% in 2022. The filing reports $1.7 million of ERC receivable at July 31.
- Nine-month 2021 other income included approximately $2.8 million from forgiveness of PPP loans and interest, contributing to the sharply higher prior-year net income. The PPP loans were fully forgiven.
- The company took possession of a new facility during the quarter, recording a $15.6 million lease liability and $12.8 million right-of-use asset; early-possession rent expense was $0.1 million. The 120-month lease is scheduled to commence December 1, 2022, at initial monthly rent of $139,123.
- The nine-month effective tax rate was 16.4% in 2022 versus 22.1% in 2021; the filing attributes the change primarily to stock-compensation tax benefits and increased R&D credits.
Outlook, risks, and contingencies
- Management stated that cash, expected operating cash flow, backlog, and available revolving credit should be sufficient for liquidity needs over the next 12 months. No formal revenue or earnings guidance is provided.
- Backlog was $30.6 million at July 31, 2022, versus $33.3 million at October 31, 2021. Orders can be canceled, and management cautions that backlog provides limited ability to predict future orders.
- Risks include COVID-related operational and customer disruption, inflation in energy and raw-material costs, uncertain global economic conditions, supply-chain impacts, and reliance on major customers. One wireless carrier represented 23% of nine-month sales and 19% of net receivables; its agreement has no minimum purchase obligation.
- The credit facility is secured and subject to financial covenants, including a maximum consolidated debt-to-EBITDA ratio of 3.00:1.00 and minimum fixed-charge coverage of 1.25:1.00.
- Management reported effective disclosure controls. Microlab integration and related policies, processes, technology, and operations remain underway. No material non-ordinary-course litigation was reported; the filing states there were no material market-risk disclosures to report.
Important facts for investors to verify
- How much of sales growth and future profitability is attributable to Microlab versus underlying organic demand, particularly project-based Custom Cabling orders?
- Whether gross margins sustain improvement after the prior-year ERC comparison effects and amid inflation and acquisition-related costs.
- Collection timing and recoverability of the $1.7 million ERC receivable and the $2.7 million tenant-improvement reimbursement receivable.
- Operating cash conversion as inventory remains elevated at $19.2 million, and the effect of debt service and the new long-term lease on liquidity.
- Compliance with credit-facility covenants, customer concentration, and the still-preliminary Microlab purchase-price allocation.