RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2022 (fiscal first quarter 2022), compared with the three months ended January 31, 2021. The filing is dated March 17, 2022. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted.
Business context
RF Industries manufactures and markets interconnect products and systems, including cable assemblies, connectors, wiring harnesses, cooling systems and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. In the quarter, Custom Cabling generated 77% of sales and RF Connector 23%. The company said Custom Cabling revenue is more volatile because it depends more on larger customized orders.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $16.918 million | $10.002 million |
| Gross profit / margin | $4.084 million / 24.1% | $2.606 million / 26.1% |
| Operating loss | $362,000 | $589,000 |
| Net loss | $277,000 | $403,000 |
| Loss per share, basic and diluted | $0.03 | $0.04 |
| Cash provided by (used in) operations | $557,000 | $(577,000) |
| Capital expenditures | $103,000 | $116,000 |
Sales rose 69% year over year, primarily because Custom Cabling sales increased 102% to $13.0 million, driven by project-based wireless carrier work involving fiber-optic cables for 4G and 5G network buildouts. RF Connector sales increased 10% to $3.9 million. Gross profit grew, but gross margin declined by 2.0 percentage points. Selling and general expense increased by $1.3 million to $4.0 million, including $0.7 million of Microlab acquisition-related costs and other one-time charges. The company recorded an $80,000 income tax benefit, versus $194,000 a year earlier.
Operating cash flow improved by $1.1 million to a $557,000 inflow. Collections of receivables provided $3.0 million, partly offset by a $2.3 million increase in inventory and the net loss. Cash and cash equivalents were $13.507 million at January 31, 2022, up from $13.053 million at October 31, 2021. Working capital was $31.3 million and the current ratio was approximately 4.2:1.
Balance sheet, liquidity and subsequent financing
At January 31, 2022, total assets were $49.736 million, total liabilities $10.284 million and stockholders’ equity $39.452 million. There was no term or revolving credit borrowing reported on the January 31 balance sheet; liabilities included $1.243 million of operating lease obligations. The company reported $27.9 million of backlog, down from $33.3 million at October 31, 2021.
Subsequent to quarter-end, RF Industries entered into a Bank of America credit facility on February 25, 2022: a $17 million term loan and a $3 million revolving facility. The term loan bears interest at 3.76% and matures March 1, 2027; the revolving facility matures March 1, 2024, with its rate based on the Bloomberg Short-Term Bank Yield Index plus 2.00%. The facility is secured by personal property of the company and certain subsidiaries and includes financial covenants.
On March 1, 2022, the company completed its $24.25 million acquisition of Microlab/FXR LLC, subject to post-closing adjustments. It funded $17 million with the term loan and approximately $7.3 million with cash on hand. Management expected the acquisition to be accretive and generate positive cash flow, but said the actual financial impact and synergies were not yet known. The company stated it believed available assets, expected operating cash flows and the revolving facility would meet liquidity needs for the next 12 months.
Management commentary, risks and unusual items
- COVID-19 intermittently affected staffing and customer operations, including delayed or deferred orders; future effects remain uncertain. The company reported no impairment indicators for goodwill or indefinite-lived intangibles at January 31, 2022, while noting future impairment could be material.
- Customer concentration increased: one wireless carrier represented 32% of quarterly sales and 37% of net receivables. The company said customer agreements have no minimum purchase obligations and customers may stop buying at any time.
- Two vendors represented 30% and 10% of inventory purchases in the quarter, compared with no vendor above 10% in the prior-year quarter.
- Management cited inflationary pressure on energy and raw-material costs and uncertainty in global economic conditions and supply chains. It noted that passing cost increases through to customers could adversely affect demand.
- The company held a $1.774 million Employee Retention Credit receivable in other current assets. It also reported $174,000 of unrecognized tax benefits, including interest and penalties.
- The February 2022 lease for new San Diego industrial and commercial space has a ten-year initial term beginning on or about December 1, 2022, with initial monthly base rent of approximately $139,000 plus operating expenses. The company also renewed Schrofftech facility leases for two years.
- PPP loans of approximately $2.8 million were fully forgiven in 2021. No material legal proceeding outside the ordinary course was reported. Disclosure controls and procedures were judged effective, and no material change in internal control over financial reporting was reported.
- No numerical revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Microlab’s post-closing purchase-price adjustments, integration costs, realized synergies and contribution to revenue, earnings and cash flow.
- Post-acquisition cash, debt service, covenant headroom and compliance with the credit facility’s leverage, fixed-charge-coverage and minimum-EBITDA requirements.
- Whether the 32%-of-sales wireless carrier remains a major customer, and how changes in its orders affect receivables and results.
- Whether backlog converts to sales and whether supplier concentration, inventory growth, inflation and COVID-related disruptions affect delivery, costs or margins.
- Collection timing and recoverability of the $1.774 million ERC receivable, and resolution of the unrecognized tax benefits.