RF Industries, Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2017, compared with fiscal 2016. Although the request metadata refers to 2016 Q4, the filing is an annual report for fiscal 2017.
Business context
RF Industries designs, manufactures, and markets interconnect products, including RF connectors and cable assemblies, custom copper and fiber cabling, wiring harnesses, and data-center products. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The company had 195 full-time employees and operated facilities in California, New York, Connecticut, and New Jersey.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $30.964 million | $30.241 million |
| Gross profit / margin | $8.722 million / 28% | $8.463 million / 28% |
| Operating income (loss) | $371,000 | ($4.688 million) |
| Net income (loss) | $382,000 | ($4.089 million) |
| Basic and diluted EPS | $0.04 | ($0.47) |
| Net cash from (used in) operations | $1.597 million | ($1.267 million) |
| Capital expenditures | $171,000 | $384,000 |
| Cash and cash equivalents at year-end | $6.039 million | $5.258 million |
| Working capital | $13.195 million | $12.885 million |
| Total assets / stockholders’ equity | $25.060 million / $21.343 million | $25.837 million / $21.392 million |
The company reported no outstanding borrowings at October 31, 2017. Current assets were $16.793 million and current liabilities were $3.598 million, for a current ratio of approximately 4.7:1. Total liabilities were $3.717 million. The company paid $707,000 in dividends during fiscal 2017, or $0.08 per share. Management said existing resources and expected operating cash flows should fund anticipated needs for at least twelve months.
Material changes and management commentary
- Sales increased 2% year over year. RF Connector and Cable Assembly sales rose 23% to $11.456 million; Custom Cabling sales fell 7% to $19.508 million, reflecting weaker first-half demand, though that segment’s second-half sales increased 14% over the first half.
- Gross margin remained 28%. Selling and general expenses declined 21% to $7.506 million, principally due to cost reductions and prior-year one-time expenses.
- The company returned to operating and net profitability after fiscal 2016 losses, which included $2.844 million in goodwill and intangible-asset impairment charges. No impairment was recorded in fiscal 2017.
- Backlog was approximately $4.0 million at October 31, 2017, versus $3.3 million a year earlier. Management cited improving post-year-end orders and expected double-digit sales growth for the quarter ending January 31, 2018 compared with the prior-year quarter.
- Operating cash flow was positive; cash increased by $781,000 after investing and financing activities. The company also paid $707,000 in dividends and $578,000 in acquisition earn-out payments during the year.
Risks, contingencies, and unusual items
- Demand remains materially exposed to wireless, broadband, and telecommunications infrastructure spending. Two customers represented approximately 20% and 11% of fiscal 2017 sales; customer agreements impose no minimum purchase commitments.
- Most RF connectors are made by third-party manufacturers, including suppliers in Asia. The company has no long-term supply agreements, creating exposure to supply interruptions, quality issues, cost increases, and geopolitical or shipping disruptions.
- Cash balances included approximately $5.2 million above federally insured limits. Inventory totaled $6.109 million and is subject to obsolescence and valuation risk.
- A Rel-Tech acquisition earn-out liability of $236,000 remained at year-end; total potential earn-out payments were capped at $800,000, with the final installment payable by May 2018.
- Management stated that the material weakness identified in fiscal 2016 concerning timely review of goodwill impairment analysis had been remediated, and concluded internal control over financial reporting was effective at October 31, 2017. The external auditor did not attest to that conclusion.
- The company disclosed no material non-ordinary-course legal proceedings. A new U.S. tax law enacted after year-end lowered the corporate tax rate to 21%; the filing’s fiscal 2017 statements do not reflect its impact, which was still being assessed.
Important facts for investors to verify
- Whether post-year-end order growth and the forecast of double-digit quarterly sales growth were achieved, and whether backlog converted into revenue.
- Whether the Custom Cabling segment recovered after its fiscal-year sales decline and improved its margins.
- Customer concentration, supplier continuity, and the extent to which cash above insured limits is protected.
- Whether the Rel-Tech earn-out was settled as expected and whether further acquisition-related or impairment charges arise.
- The actual effect of the 21% corporate tax rate and the continued effectiveness of the remediated internal controls.
- Future dividend decisions: the filing states dividends are discretionary and provides no assurance of continued payments.