RF Industries, Ltd. — Form 10-Q Summary
Period: Quarter and six months ended April 30, 2018. The request metadata says “2017 Q2,” but the filing is for fiscal 2018 Q2. Unless otherwise noted, dollar amounts are in millions.
Business context and reporting period
RF Industries designs, manufactures, and markets interconnect products, including cable assemblies, connectors, fiber-optic products, and wiring harnesses. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. Custom Cabling generated 84% of sales in the six-month period.
Financial performance
| Metric | Three months ended April 30, 2018 | Six months ended April 30, 2018 |
|---|---|---|
| Net sales | $22.380 (+195% year over year) | $32.721 (+129%) |
| Gross profit / margin | $8.084 / 36% (prior year 26%) | $11.157 / 34% (prior year 27%) |
| Operating income (loss) | $4.016 | $4.570 (prior year loss of $0.293) |
| Net income (loss) | $3.204 | $3.658 (prior year loss of $0.115) |
| Diluted EPS | $0.34 | $0.40 (prior year loss of $0.01) |
Six-month operating cash flow was $2.442, versus cash used of $0.538 in the prior-year period. Investing activities used $0.045; financing activities provided $0.053. Cash increased $2.450 to $8.489. Higher receivables used $7.897 of cash and higher inventory used $0.966, partly offset by increases in accounts payable, accrued expenses, and income taxes payable.
At April 30, 2018, current assets were $27.874 and current liabilities $10.428, yielding working capital of $17.5 million and a current ratio of approximately 2.7:1. Total liabilities were $10.557; the company reported no borrowed-fund debt. Stockholders’ equity was $25.186.
Material changes and drivers
- Sales growth was concentrated in Custom Cabling, whose second-quarter sales rose $14.6 million year over year; RF Connector sales increased only modestly. Management attributed Custom Cabling growth to fiber-optic and copper cabling, patch cords, wiring harnesses, and project work for OEM and wireless-carrier customers, alongside traditional business.
- Higher Custom Cabling volume improved gross margins as fixed manufacturing costs were spread over greater sales. Selling and general expense rose, but fell as a share of sales: 15% versus 22% for Q2 and 17% versus 26% for the six-month period.
- The RF Connector segment reported a pretax loss of $0.331 million for Q2 and $0.344 million for the six-month period. Management cited corporate overhead allocations, including accrued bonuses tied to overall profitability.
- Prior-year discontinued-operations income included RadioMobile royalties and proceeds from equipment sales. No discontinued-operations income was reported in 2018; the RadioMobile royalty period had expired.
Outlook, risks, and unusual items
- Management said it expected second-half fiscal 2018 sales to likely be below first-half sales, despite a $9.5 million Custom Cabling backlog at April 30. The segment had filled a substantial portion of its $20.2 million January 31 backlog during Q2. The company said it could not predict future orders.
- Management believed cash, operating cash generation, current assets, and backlog would support liquidity needs for at least twelve months. It did not anticipate significant capital-equipment spending in the next twelve months.
- Customer concentration is significant: one customer represented approximately 69% of Q2 and 59% of six-month sales, and 74% of net receivables at April 30. Customer agreements do not require minimum purchases; order reductions, cancellations, or loss of the customer could materially affect results.
- One vendor represented 46% of Q2 inventory purchases and 38% for the six-month period. Cash balances exceeded federal insurance limits by approximately $7.5 million.
- The company recorded a $112,000 income-tax benefit from adopting stock-compensation guidance and cited a $137,000 stock-option windfall benefit among factors affecting its effective tax rate. The Tax Act reduced the U.S. federal corporate rate; the company’s analysis remained subject to refinement through December 22, 2018.
- A $0.220 million Level 3 earn-out liability remained at April 30, 2018. Its valuation depends on assumptions about qualifying gross profit and EBITDA; the Rel-Tech agreement provided for payments of up to $0.800 million through May 31, 2018.
- No material changes to previously disclosed risk factors were reported. The filing reported no material non-ordinary-course legal proceedings and no material market-risk disclosure. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the extraordinary sales growth and $9.5 million backlog translate into sustained orders and revenue, particularly after management’s warning that second-half sales would likely be lower.
- The extent of dependence on the largest customer and major inventory vendor, including any changes in customer orders or supplier availability.
- Receivables collection and working-capital requirements: receivables increased substantially, while one customer accounted for 74% of the period-end balance.
- Subsequent settlement or remeasurement of the earn-out liability, and any final Tax Act adjustments during the measurement period.
- The continued profitability of Custom Cabling and the improvement, if any, in the RF Connector segment, which remained loss-making.