RF Industries, Ltd. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended July 31, 2019 (fiscal 2019 third quarter), not 2018 Q3 as stated in the request metadata. Unless noted otherwise, financial amounts below are in millions; the filing presents statements in thousands.
Business context and reporting period
RF Industries designs, manufactures, markets, and distributes interconnect products, including RF connectors, cable assemblies, fiber-optic and copper cabling, and wiring harnesses. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The company acquired C Enterprises on March 15, 2019; its results are included in the Custom Cabling segment from that date. Comnet, sold in October 2018, is reported as discontinued operations in the 2018 comparisons.
Key financial metrics
| Metric | Three months ended July 31, 2019 | Three months ended July 31, 2018 | Nine months ended July 31, 2019 | Nine months ended July 31, 2018 |
|---|---|---|---|---|
| Net sales | $15.511 | $11.820 | $39.784 | $40.302 |
| Gross profit | $4.266 | $4.035 | $11.505 | $14.147 |
| Gross margin | 28% | 34% | 29% | 35% |
| Operating income | $1.276 | $2.015 | $3.424 | $6.333 |
| Income from continuing operations | $1.038 | $1.642 | $2.739 | $5.111 |
| Consolidated net income | $1.038 | $1.731 | $2.739 | $5.389 |
| Diluted EPS from continuing operations | $0.11 | $0.17 | $0.28 | $0.54 |
| Cash flow from continuing operations | Not separately presented | Not separately presented | $(1.990) | $4.188 |
At July 31, 2019, cash and cash equivalents were $13.312 million, current assets $32.081 million, current liabilities $5.386 million, working capital $26.7 million, and the current ratio approximately 6.0:1. The company reported no outstanding borrowings. Total liabilities were $5.477 million and total stockholders’ equity was $30.636 million.
Material changes versus the prior comparable period
- Third-quarter sales grew 31% year over year, with Custom Cabling sales up 39% and RF Connector sales up 10%. The filing attributes growth to C Enterprises, traditional business, and project work.
- Despite higher quarterly sales, gross margin fell to 28% from 34%; management cited product mix and higher production wages. Operating income declined to $1.276 million from $2.015 million, and diluted continuing-operations EPS fell to $0.11 from $0.17.
- Nine-month sales declined 1% despite C Enterprises’ contribution. Custom Cabling sales fell 7%, reflecting comparison with unusually large prior-year orders; RF Connector sales rose 18%.
- Nine-month gross margin fell to 29% from 35%. Continuing-operations income declined to $2.739 million from $5.111 million, and diluted continuing-operations EPS to $0.28 from $0.54.
- Quarterly selling and general expense rose to $2.609 million from $1.751 million, reflecting C Enterprises, compensation and bonus timing, distributor marketing, and evaluation of potential acquisitions. Nine-month expense included approximately $0.1 million of C Enterprises acquisition costs.
- Operating cash flow from continuing operations was negative $1.990 million for the nine months, versus positive $4.188 million. Management attributed the 2019 outflow principally to a $4.358 million increase in receivables, a $0.498 million increase in inventory, and a $0.908 million decrease in accrued expenses.
Outlook, risks, contingencies, and unusual items
- Management said existing assets and anticipated operating cash generation should fund liquidity and capital needs for at least 12 months. Backlog was $8 million at July 31, 2019, versus $11 million at October 31, 2018; management expected liquidity and capital resources to improve during the remainder of the fiscal year. The filing provides no specific revenue or earnings guidance.
- Management noted that backlog and future orders are difficult to predict; customer purchase orders may be canceled. Major customer agreements have no minimum purchase obligations. Two customers represented approximately 23% and 19% of nine-month sales; one customer accounted for 47% of accounts receivable at July 31.
- Two vendors accounted for 23% and 14% of third-quarter inventory purchases. The company also reported $11.8 million of cash above federally insured limits.
- The company was evaluating the impact of enacted import tariffs; management did not expect a material financial impact but acknowledged uncertainty. It also identified inventory valuation, customer collectability, impairment estimates, and income-tax judgments as areas involving estimates and risk.
- The C Enterprises acquisition cost $0.6 million in cash plus assumed liabilities; acquisition-related costs of approximately $0.1 million were expensed. C Enterprises contributed $2.9 million of third-quarter sales and $4.5 million for the nine-month period.
- The company paid $0.560 million in dividends during the nine months and declared a further $0.02 per-share quarterly dividend on September 9, 2019, payable October 15, 2019. Unrecognized tax benefits, including interest and penalties, were $0.090 million. The filing reported no material legal proceedings outside the ordinary course and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the lower gross margins and profitability persist, particularly given product mix and production-wage pressures.
- Collection of the large receivables balance and whether working-capital needs continue to weigh on operating cash flow.
- Customer concentration, the 47% receivables exposure to one customer, and the absence of contractual minimum purchases.
- Conversion of the $8 million backlog into shipments and cash, including the possibility of order cancellations.
- C Enterprises’ contribution, integration costs, and performance within Custom Cabling; also verify any subsequent acquisition activity.
- Potential impacts from tariffs, vendor concentration, and cash balances exceeding federal deposit-insurance limits.