RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2012; filed June 14, 2012. RF Industries sells connectors and cable assemblies, wireless products, medical cabling and fiber-optic products. Results include Cables Unlimited, acquired June 15, 2011, for periods after the acquisition.
Financial performance
| Metric | Three months ended Apr. 30, 2012 | Three months ended Apr. 30, 2011 | Six months ended Apr. 30, 2012 | Six months ended Apr. 30, 2011 |
|---|---|---|---|---|
| Net sales | $6.672 million | $4.392 million | $12.231 million | $8.532 million |
| Gross profit / margin | $3.022 million / 45% | $2.237 million / 51% | $5.524 million / 45% | $4.407 million / 52% |
| Operating income | $899,000 | $622,000 | $1.099 million | $1.150 million |
| Consolidated net income | $602,000 | $407,000 | $720,000 | $758,000 |
| Diluted EPS | $0.08 | $0.06 | $0.09 | $0.11 |
Second-quarter sales grew 52%, but six-month pretax income declined 4% and net income fell from $758,000 to $720,000. Selling and general expense rose 44% in the quarter and 47% for six months, partly reflecting Cables Unlimited and higher staffing and salary costs. Gross margin fell primarily because Cables Unlimited generally earns lower margins, as well as higher raw-material and labor costs in the RF Connector and Cable Assembly segment.
Cash flow and liquidity: Six-month operating cash flow was $859,000, compared with $292,000 a year earlier. Investing activities provided $2.900 million, mainly from certificate-of-deposit maturities, offset by $446,000 of capital expenditures. Financing activities used $1.707 million, primarily for $1.143 million of share repurchases and $695,000 of dividends. Cash and equivalents were $3.813 million and certificates of deposit were $748,000 at April 30, 2012. Working capital was $13.200 million, with a reported current ratio of approximately 7:1. The company reported no outstanding indebtedness at quarter-end; current liabilities were $2.292 million.
Total assets were $22.061 million versus $24.378 million at October 31, 2011; total liabilities were $3.479 million versus $4.700 million. The company deconsolidated K&K Unlimited, LLC on January 25, 2012 after it was no longer deemed the primary beneficiary. This reduced assets by approximately $1.6 million and liabilities by approximately $1.4 million, with no material income-statement effect.
Business changes and outlook
- Second-quarter growth reflected $1.836 million of Cables Unlimited sales and increased RF Wireless and Medical Cabling sales. RF Wireless benefited from revenue on a $2.6 million Los Angeles County Fire Department contract awarded in November 2011.
- For the six-month comparison, Cables Unlimited contributed $3.280 million of sales. RF Connector and Cable Assembly sales declined $350,000, partly due to a large nonrecurring prior-year order; RF Wireless and Medical Cabling sales increased.
- Management believes existing current assets and anticipated operating cash flow will fund needs for at least 12 months. The company had no bank credit facility, and management noted that future bank borrowing, if needed, is not assured or guaranteed on favorable terms. No formal revenue or earnings guidance was provided.
- Management estimated a 41.9% effective tax rate for fiscal 2012. The six-month reported rate was 36.2%; expiring research credits and discrete acquisition-cost tax items affected period comparisons.
- A $0.05-per-share dividend declared May 30, 2012 was scheduled for payment July 16, 2012. Management did not expect it to materially affect liquidity or capital resources.
Risks, contingencies and unusual items
- One customer generated approximately 14% of sales in both the quarter and six-month period. Its agreements have no minimum purchase obligations, and loss or reduction of orders could materially affect revenue and profit.
- Inventory valuation, receivable allowances, goodwill and intangible-asset impairment assessments involve management estimates. Inventory was $6.449 million; management identifies potential obsolescence or excess inventory as a risk.
- Two vendors accounted for 16% and 10% of inventory purchases in the six-month period.
- Unrecognized tax benefits were $79,223, with $21,106 of accrued interest and penalties. The filing reports no material interest or penalties in income tax expense for the periods presented.
- No legal proceedings were reported. Management concluded disclosure controls were effective as of April 30, 2012 and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- How much of sales growth and future profitability is attributable to Cables Unlimited and the LA County contract, and how sustainable are those contributions?
- Whether gross margins can stabilize as lower-margin acquisition sales grow and input and labor costs change.
- Customer concentration, order trends and inventory quality, including the potential for cancellations or write-downs.
- Cash generation after dividends, repurchases and capital spending, and the company’s access to financing without an existing credit facility.
- The expected fiscal 2012 tax rate and the status or resolution of uncertain tax positions.