RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended July 31, 2021. Although the request metadata labels this “2020 Q3,” the filing itself is for fiscal 2021 Q3.
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 Custom Cabling. Custom Cabling generated about 70% of nine-month sales; RF Connector generated about 30%.
Financial results
| Metric | Three months ended July 31, 2021 | Nine months ended July 31, 2021 |
|---|---|---|
| Net sales | $15.3 million, up 60% year over year | $36.3 million, up 12% |
| Gross profit / margin | $5.1 million / 33.1%; prior-year margin 28.6% | $12.4 million / 34.2%; prior-year margin 26.5% |
| Operating income | $1.2 million; prior-year operating loss $0.2 million | $3.3 million; prior-year operating loss $0.4 million |
| Net income (loss) | $0.9 million; prior-year loss $0.1 million | $5.4 million; prior-year loss $0.2 million |
| Diluted EPS | $0.09; prior-year loss per share $0.01 | $0.53; prior-year loss per share $0.02 |
| Operating cash flow | Not provided for the quarter | Cash used of $3.6 million; prior-year cash provided of $4.3 million |
For the nine months, the $2.8 million PPP loan forgiveness was recorded as other income and contributed substantially to reported pretax income. The company also recognized an Employee Retention Credit (ERC) of approximately $2.8 million, reducing labor costs; $2.75 million remained recorded in other current assets at July 31. Management’s adjusted gross-profit figures excluding the ERC were $4.2 million for the quarter (27.7% margin) and $9.8 million for the nine months (27.0% margin).
Financial position and liquidity
- At July 31, 2021, cash was $12.6 million, down from $15.8 million at October 31, 2020. Total assets were $46.4 million; total liabilities were $7.8 million; stockholders’ equity was $38.6 million.
- Current assets were $37.6 million and current liabilities $7.0 million; management reported working capital of $30.6 million and a current ratio of approximately 5.4:1.
- The company had no PPP loan balance after forgiveness and no revolving credit facility: its $5.0 million line of credit was closed in December 2020. Operating lease liabilities totaled $1.5 million.
- Nine-month operating cash use reflected, among other items, increases in receivables ($4.9 million), inventory ($1.8 million), and other current assets ($3.3 million). Capital expenditures were $0.2 million. Cash declined by $3.2 million over the period.
- Backlog was $31.9 million at July 31, compared with $6.3 million at October 31, 2020; customer orders may be canceled.
Changes, outlook, and risks
- Quarterly sales growth was led by Custom Cabling, up 91% to $11.3 million, primarily on wireless-carrier demand and fiber-optic products for 4G/5G network builds. RF Connector sales rose 9% to $3.9 million. For the nine months, Custom Cabling sales rose 16% to $25.3 million and RF Connector sales rose 5% to $11.1 million.
- Reported gross-margin improvement was significantly supported by the ERC. Excluding that credit, nine-month gross margin was 27.0%, versus 26.5% a year earlier. Selling and general expense increased year over year, including higher commissions, sales staffing, and a $0.2 million noncash charge from accelerated vesting of an officer’s options.
- Management said existing assets, expected operating cash generation, and backlog should fund liquidity and capital needs for at least 12 months from the filing date, while noting uncertainty from COVID-19. It did not provide numeric revenue or earnings guidance. It did not anticipate material additional capital-equipment spending over the next 12 months.
- COVID-19 had affected employee availability, facilities, suppliers, and customer orders; continued or worsening disruption could increase costs, make demand and collections volatile, and reduce sales. The company also cited potential impairment risk if the pandemic’s effects become clearer, though no impairment indicators were identified at July 31.
- Customer and supplier concentration warrant attention: one wireless provider represented 21% of quarterly sales and 36% of period-end net receivables; one vendor represented 27% of quarterly inventory purchases. Major customers have no minimum-purchase commitments.
- The Schrofftech acquisition earn-out, payable through October 31, 2021 and potentially up to $2.4 million, had a reported fair-value liability of zero at July 31. Future changes in forecasts or assumptions could affect expense. The filing reported no material non-ordinary-course litigation and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales growth and the large backlog convert into completed orders and cash, given the stated cancellation risk and negative operating cash flow.
- The timing and collection of the ERC receivable and the tax-related amounts included in other current assets.
- Underlying margins and earnings excluding ERC benefits and PPP loan forgiveness, and whether operating performance remains profitable without these items.
- Exposure to the major wireless customer and concentrated vendor, including changes in orders, receivables collection, and supply availability.
- Liquidity planning in the absence of a credit facility, and any outcome or expense relating to the Schrofftech earn-out.