RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended January 31, 2013. The filing is unaudited and covers RF Industries and its wholly owned subsidiary, Cables Unlimited.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $10.51 million | $5.56 million |
| Gross profit / gross margin | $4.94 million / 47% | $2.50 million / 45% |
| Operating income | $2.06 million | $0.20 million |
| Consolidated net income | $1.48 million | $0.12 million |
| Diluted earnings per share | $0.19 | $0.02 |
| Cash provided by operating activities | $0.65 million | $0.09 million |
- Sales rose 89% year over year. Gross margin increased to 47%; net income attributable to RF Industries and its subsidiary increased to $1.48 million from $0.12 million.
- At January 31, cash and cash equivalents were $6.95 million, working capital was $17.38 million, and the current ratio was approximately 6:1. Current assets were $21.18 million and current liabilities were $3.80 million.
- The company reported no outstanding indebtedness other than accounts payable, accrued expenses, and income taxes payable. Total liabilities were $4.88 million.
- Cash increased $1.46 million during the quarter. Investing activities used $42,416; financing activities provided $849,844, including $1.31 million from option exercises, partly offset by $700,215 in dividends paid.
- Shares outstanding increased to 7,467,809 from 6,978,374 at October 31, 2012, primarily reflecting 489,435 shares issued upon option exercises.
Material changes and business drivers
- Cables Unlimited sales increased 273% to $5.39 million, principally due to approximately $3.6 million in sales of new Optiflex Cable. RF Connector and Cable Assembly sales rose 23% to $3.82 million; RF Wireless sales rose 82% to $0.61 million; Medical Cabling and Interconnector sales increased 2% to $0.69 million.
- Management attributed improved gross margin to higher volumes, production efficiencies, product mix and pricing. RF Wireless margin benefited from a Los Angeles County Fire Department contract worth $2.6 million, expected to be completed by the end of fiscal Q2 2013.
- Selling and general expenses rose 29% to $2.59 million. The company cited $217,000 in senior-management lump-sum bonuses, $151,000 in additional legal and consulting fees, $54,000 in accrued management bonuses, and $130,000 in higher Cables Unlimited commissions.
- The effective tax rate was 28.2%, versus 47.4% a year earlier. Management attributed the lower rate partly to unusual tax benefits from incentive-stock-option disqualifying dispositions and said it expected the rate to increase and become more comparable to the prior year. The filing cites $243,692 of tax benefit from these dispositions and $249,344 of fiscal-quarter discrete tax items.
- Comparability note: the prior-year quarter included K&K Unlimited, LLC as a consolidated variable interest entity until January 25, 2012, when it was deconsolidated after refinancing and release of Cables Unlimited as guarantor. The filing says deconsolidation did not materially affect prior-year quarterly operating results.
Outlook, risks and other matters
- Management said existing current assets and expected operating cash generation 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 numerical revenue or earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Optiflex accounted for approximately $3.6 million, or 34% of quarterly sales. Its demand depends on wireless-carrier tower upgrades and customer adoption; the company cannot estimate the pace of upgrades and warned that competitors could enter the market. The product represented a substantial portion of the year-over-year sales increase.
- One customer accounted for approximately 53% of quarterly sales and 48% of accounts receivable at quarter-end. Its purchase arrangements have no minimum-volume commitment, and reduced or discontinued orders could materially affect revenue and profits. The filing also says the customer’s Optiflex purchases could stop at any time.
- Approximately $6.2 million of cash exceeded federally insured limits. Management identified inventory valuation, receivable collectability, and goodwill and intangible-asset impairment assessments as areas involving significant estimates.
- The company reported no legal proceedings to disclose and no material change in internal control over financial reporting during the quarter. Disclosure controls were concluded to be effective as of January 31, 2013.
Important facts for investors to verify
- Whether Optiflex orders and the related tower-upgrade demand continue, and how much of sales and earnings depend on this product.
- The top customer’s ongoing order levels, receivable collection, and exposure to the absence of minimum-purchase commitments.
- Whether operating cash flow continues to track earnings, given the quarter’s increases in receivables and other current assets and the reduction in accounts payable.
- The expected tax rate after the quarter’s option-related discrete tax benefits, and the potential effect on future net income.
- The effect of option exercises and outstanding options on future share count and diluted earnings per share.