RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended July 31, 2015. The supplied filing is for 2015 Q3, despite the request metadata specifying 2014 Q3. Figures are in thousands of dollars unless otherwise noted.
Business context and performance
RF Industries designs, manufactures, and markets cable, connector, and interconnect products. Its three reporting segments are RF Connector and Cable Assembly, Custom Cabling Manufacturing and Assembly, and Medical Cabling and Interconnector. Results include Comnet for the fiscal year from November 1, 2014, Rel-Tech from June 1, 2015, and the CompPro product line from May 19, 2015.
| Metric | Three months ended July 31, 2015 | Three months ended July 31, 2014 | Nine months ended July 31, 2015 | Nine months ended July 31, 2014 |
|---|---|---|---|---|
| Net sales | $8,899 | $5,536 | $23,868 | $17,150 |
| Gross profit | $2,835 | $2,488 | $8,404 | $7,822 |
| Gross margin | 32% | 45% | 35% | 46% |
| Operating income | $133 | $628 | $883 | $1,730 |
| Income from continuing operations | $182 | $358 | $682 | $1,082 |
| Net income | $211 | $372 | $724 | $1,114 |
| Diluted EPS | $0.02 | $0.04 | $0.08 | $0.13 |
Financial position and cash flow
- At July 31, 2015, cash was $7.908 million, down from $14.718 million at October 31, 2014. Current assets were $20.543 million and current liabilities were $4.861 million; working capital was approximately $15.7 million and the current ratio approximately 4.2:1.
- Total liabilities were $7.106 million and stockholders’ equity was $26.244 million. The company reported no borrowings on its $5.0 million line of credit at quarter-end; the full facility was available, subject to its covenants.
- For the nine-month period, operating cash flow was $243,000, investing cash outflow was $5.272 million, and financing cash outflow was $1.781 million. Investing outflows mainly reflected acquisitions; financing outflows included $1.773 million of dividends.
- Accounts receivable increased to $3.915 million from $2.428 million, and inventory increased to $7.263 million from $5.259 million, compared with October 31, 2014.
Material changes and management commentary
- Quarterly sales rose 61%, and nine-month sales rose 39%, primarily because of acquired businesses. Comnet and Rel-Tech contributed $4.0 million of quarter sales and $9.0 million of nine-month sales. Excluding those acquisitions, other operations’ sales declined by $0.6 million in the quarter and $2.3 million over nine months.
- Management attributed weaker legacy sales to an industry-wide slowdown in wireless and cable spending, declining Optiflex and other fiber-optic orders, and lower medical-cabling sales to a significant customer.
- Gross margin fell to 32% for the quarter and 35% year to date. Management cited lower Optiflex sales, fixed manufacturing costs spread over lower revenue, and the acquired businesses’ historically lower margins. It expected aggregate margins to remain below historical levels as the lower-margin Custom Cabling segment became a larger share of sales.
- Operating income and net income declined despite higher sales. Selling and general expense increased with the acquired operations and related amortization and acquisition costs. The nine-month effective tax rate fell to 24% from 38%, principally due to discrete benefits from state income reapportionment.
Acquisitions, outlook, and risks
- Acquisitions included Comnet, with estimated purchase consideration of $5.385 million including a $1.235 million earn-out; Rel-Tech, with preliminary estimated consideration of $2.910 million including a $610,000 earn-out; and the CompPro product line for $700,000 cash. Purchase-price allocations for Rel-Tech and CompPro were preliminary. Comnet and Rel-Tech also have additional contractual earn-outs, subject to performance targets.
- Management stated that cash and expected operating cash flow, together with the available credit line, should cover anticipated liquidity needs for at least twelve months. It did not anticipate material equipment purchases over the next twelve months. No earnings or revenue guidance was provided.
- A single customer represented 18% of nine-month sales and 28% of receivables at July 31. The customer has no minimum purchase obligation; reduced or canceled orders could materially affect results. Approximately $6.7 million of cash exceeded federally insured limits.
- Acquisition integration and earn-out valuation, inventory valuation and obsolescence, lower margins, and the ability to sustain sales are notable considerations. The company disclosed no material changes to the risk factors in its prior Form 10-K.
- A shareholder-related employment lawsuit was settled in July 2015 for an amount covered by insurance; formal dismissal was expected shortly. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of future sales and earnings growth is attributable to acquired operations versus the legacy business, and whether acquired businesses meet earn-out targets.
- Whether gross margins stabilize at the lower levels management anticipates, and whether legacy demand improves.
- Why operating cash flow was only $243,000 despite $724,000 of nine-month net income, and how working capital and acquisition-related costs develop.
- The final purchase-price allocations, goodwill and intangible-asset valuations, and potential effects of earn-out remeasurement.
- Continued reliance on the major customer and exposure of cash balances above insured limits.