RF Industries, Ltd. — Form 10-Q Summary
Business and reporting period: RF Industries designs, manufactures, and markets cable, connector, interconnect, and wireless products. This filing covers the three and nine months ended July 31, 2013, compared with the corresponding 2012 periods. Financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance
| Metric | Three months 2013 | Three months 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $9,585 | $7,316 | $29,146 | $19,229 |
| Gross profit | $3,976 | $3,334 | $12,983 | $8,708 |
| Operating income | $1,556 | $1,161 | $5,434 | $2,281 |
| Income from continuing operations | $1,155 | $775 | $3,931 | $1,507 |
| Net income attributable to RF Industries | $917 | $735 | $3,577 | $1,453 |
| Diluted EPS | $0.11 | $0.10 | $0.43 | $0.19 |
- Sales increased 31% in the quarter and 52% year to date. Gross margin was approximately 41% for the quarter, down from 46%; year-to-date gross margin was approximately 45%, broadly consistent with the prior year.
- Quarterly net income included a $238 after-tax loss from discontinued operations; the nine-month discontinued-operations loss was $354.
- Operating cash flow was $4,518 for the nine months, versus $2,250 in 2012. Cash rose to $10,782 from $5,492 at October 31, 2012. Capital expenditures were $145; dividends paid were $1,790.
- At July 31, 2013, current assets were $22,900 and current liabilities $3,016, yielding working capital of approximately $19,900 and a current ratio of about 8:1. The company reported no outstanding debt.
- Total assets were $28,978 and stockholders’ equity was $24,885. The company paid $0.24 per share in dividends during the nine-month period and declared a further $0.07 per-share dividend payable October 15, 2013.
Material changes and business drivers
- Cables Unlimited drove most of the growth: sales rose 103% to $5,548 for the quarter and 156% to $15,390 year to date. A custom cable product introduced in April 2012 contributed $4,300 in quarterly sales and $10,900 year to date.
- RF Connector and Cable Assembly quarterly sales fell 18% to $3,164, which management attributed to industry-wide softer demand. Medical Cabling and Interconnector sales increased 34% to $766 for the quarter. RF Wireless quarterly sales declined 27% to $107 as the Los Angeles County Fire Department contract wound down.
- The quarter’s lower consolidated gross margin reflected a greater share of sales from Cables Unlimited, which generally has lower margins than the company overall. Year-to-date margin held near 45%, with improved segment margins at Cables Unlimited, RF Connector and Cable Assembly, and Medical Cabling.
- Selling and general expense increased 10% in the quarter and approximately $1.1 million year to date, reflecting higher commissions, wages and benefits, and legal and consulting costs; year-to-date expense also included senior-management bonuses.
- During the nine months, employees exercised 877,728 stock options, generating $2,225 in net proceeds and increasing shares outstanding. The filing reports 7,856,102 shares outstanding at July 31, 2013.
Outlook, risks, and unusual items
- Management said available assets and expected operating cash flow should fund anticipated needs for at least 12 months. The company had no commercial bank credit facility and did not anticipate material capital equipment needs over the next 12 months.
- No specific revenue or earnings guidance was provided. Management expected the effective tax rate to rise if the 2013 tax benefit from employees’ disqualifying incentive-stock-option dispositions did not continue.
- Management cautioned that RF Wireless revenue could continue to decrease until larger contracts are obtained, and that sales to certain Israeli customers may decline through the remainder of fiscal 2013.
- One customer accounted for 53% of nine-month sales and 55% of quarterly sales. The customer has no minimum purchase commitment. A single custom cable product accounted for $10,900, or 37%, of nine-month sales; management identified uncertain carrier demand and competing products as risks to its future sales and pricing.
- Three vendors represented 33%, 14%, and 10% of nine-month inventory purchases. Approximately $10,000 of cash exceeded federally insured limits at July 31, 2013.
- RF Neulink was sold effective July 31, 2013, with no cash paid at closing. Consideration is contingent on inventory sales and royalties of 5%–10% on certain product sales, subject to a $450 aggregate cap. The company recorded a $297 inventory write-off and $33 of severance expense related to the disposal.
- A former employee filed a Sarbanes-Oxley whistleblower retaliation complaint with the Department of Labor alleging retaliatory termination and seeking reinstatement or monetary and other relief. The company disputes the claim and notified its employment practices insurer.
- After quarter-end, the company entered short-term employment agreements with its CEO, president, and Cables Unlimited president through December 31, 2013. Agreements include specified severance provisions and potential change-of-control payments.
Important facts for investors to verify
- Whether the large customer and custom cable product sustain demand, given the absence of purchase commitments and the stated competition and customer-concentration risks.
- Whether Cables Unlimited growth and margins remain durable, and whether RF Wireless revenue stabilizes after the county contract winds down.
- The eventual cash proceeds and royalties from the RF Neulink asset sale, which are contingent rather than fixed at closing.
- The outcome and potential financial exposure of the former employee’s whistleblower complaint.
- Whether operating cash generation remains sufficient without a committed credit facility, and whether excess cash balances remain above federal insurance limits.