RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2015 (fiscal 2015 first quarter; the filing metadata’s “2014 Q1” does not match the filing period). Comparisons are with the three months ended January 31, 2014. Financial amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $6.894 | $5.850 | +18% |
| Gross profit / margin | $2.500 / 36% | $2.582 / 44% | Profit down $0.082; margin down 8 percentage points |
| Operating income | $0.026 | $0.339 | Down $0.313 |
| Income from continuing operations | $0.052 | $0.264 | Down $0.212 |
| Net income | $0.065 | $0.265 | Down $0.200 |
| Diluted EPS | $0.01 | $0.03 | Down $0.02 |
| Operating cash flow | $(0.637) | $0.898 | Declined $1.535 |
Lower gross margin reflected reduced higher-margin Optiflex sales, fixed manufacturing costs over a lower revenue base, and Comnet’s historically lower-margin business mix. Selling and general expense rose 15% to $2.257 million, largely due to Comnet; engineering expense fell 15% to $0.217 million. A $0.021 million income tax benefit (effective rate shown as negative 68%) included a discrete R&D tax-credit benefit. Discontinued operations contributed $0.013 million, primarily royalty income.
Liquidity, balance sheet, and cash flows
- At January 31, 2015, cash and cash equivalents were $10.922 million, plus $0.300 million of restricted cash; cash was $14.718 million at October 31, 2014. Current assets were $21.920 million and current liabilities $4.118 million, yielding reported working capital of $17.9 million and a current ratio of approximately 5.5:1.
- No borrowings were outstanding under the $5.0 million secured line of credit; the full amount was available. The facility matures June 30, 2016 and contains covenants. The company reported no outstanding indebtedness apart from ordinary operating liabilities.
- Operating activities used $0.637 million, attributed in part to inventory purchases and payments of payables and expenses. Investing activities used $2.583 million, including $2.249 million for Comnet net of cash acquired and $0.300 million placed in escrow. Financing activities used $0.576 million, including $0.578 million of dividends.
- Total liabilities were $5.247 million; goodwill was $5.387 million and net amortizable intangible assets were $2.438 million, both higher following the Comnet acquisition.
Business changes, outlook, and risks
- The company acquired Comnet Telecom Supply, a telecommunications and data-products supplier, effective for accounting purposes November 1, 2014; closing occurred January 20, 2015. Comnet added $2.2 million of quarterly revenue. The purchase price was estimated at $4.795 million, including $3.090 million cash, 252,381 shares valued at $1.060 million, and a $0.645 million estimated earn-out liability. The seller may earn up to $1.360 million over two years if milestones are met. Purchase accounting remained preliminary.
- Reported sales growth was acquisition-driven: excluding Comnet, sales at the other divisions declined in aggregate. RF Connector and Cable Assembly sales fell 10% to $2.7 million amid industry-wide softening; Medical Cabling and Interconnector sales fell 23% to $0.576 million, reflecting lower sales to a significant customer. Cables Unlimited sales declined from $2.1 million to $1.4 million.
- Management said current assets, expected operating cash generation, and available credit should cover anticipated liquidity needs for at least 12 months. It anticipated no material additional capital-equipment needs in that period and said future acquisitions could reduce liquidity. No specific earnings or revenue guidance was provided. Management expected the effective tax rate to increase from the unusually low quarter rate; it also expected Comnet’s lower margins to weigh on aggregate gross margins.
- Customer concentration is material: one customer represented 17% of sales and 19% of receivables at January 31, 2015. Its agreements impose no minimum purchases. Approximately $10.6 million of cash exceeded federally insured limits. Inventory obsolescence, acquisition execution and earn-out obligations are additional matters to monitor.
- A former employee’s federal lawsuit alleging retaliation and wrongful termination remained disclosed; damages sought were unspecified, and the matter had been tendered to the company’s insurer. The filing reported no material change to previously disclosed risk factors. Management stated disclosure controls were effective and that no material quarterly change in internal control over financial reporting occurred.
Important facts for investors to verify
- Whether underlying sales and profitability improve without acquisition-related revenue, and how Comnet affects margins and cash generation.
- Final Comnet purchase-price allocation, earn-out milestones and potential payments, and integration results.
- The major customer’s order activity and the company’s exposure to uninsured cash balances.
- Cash conversion, inventory levels, and compliance with the line-of-credit covenants as operating cash flow was negative.
- The stock-repurchase disclosure is inconsistent: the notes state 22,828 shares repurchased, while MD&A states 28,828. Verify the correct figure.
- The filing reports $0.578 million of quarterly dividends and a subsequent $0.07-per-share dividend declared for April 15, 2015.