RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2020; comparisons are with the periods ended July 31, 2019. The request metadata says “2019 Q3,” but the filing itself reports fiscal 2020 Q3.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $9.54 | $15.51 | $32.35 | $39.78 |
| Gross profit / margin | $2.73 / 28.6% | $4.27 / 27.5% | $8.57 / 26.5% | $11.51 / 28.9% |
| Operating income (loss) | $(0.22) | $1.28 | $(0.41) | $3.42 |
| Net income (loss) | $(0.08) | $1.04 | $(0.24) | $2.74 |
| Diluted earnings (loss) per share | $(0.01) | $0.11 | $(0.02) | $0.28 |
- Quarterly sales fell about 38%; nine-month sales fell about 19%. Gross profit declined in both periods. The quarterly gross margin improved, while the nine-month margin declined.
- For the nine months, operating cash flow was $4.26 million, versus cash used of $1.99 million a year earlier. Investing activities used $4.02 million, including $3.90 million for Schrofftech; financing provided $2.85 million, including the PPP loan. Cash increased $3.09 million to $15.63 million.
- At July 31, cash was $15.63 million; working capital was $25.2 million and the current ratio was approximately 5.2. Total liabilities were $9.10 million and stockholders’ equity was $31.80 million.
- The $2.79 million PPP loan was recorded as $1.23 million current and $1.55 million long term. The $5 million revolving credit facility was undrawn; the company reported covenant compliance. It also reported operating lease liabilities of approximately $1.75 million.
Material changes and drivers
- COVID-19-related disruption reduced demand, particularly for Custom Cabling project work. Management cited delayed or cancelled customer projects, restricted site access and reduced workforce availability, especially in the Northeast. Custom Cabling nine-month sales fell 27% to $21.78 million; RF Connector sales rose 5% to $10.57 million.
- Schrofftech, acquired effective November 1, 2019, contributed $3.0 million of nine-month revenue and a $0.27 million pretax loss. Its third-quarter contribution was $0.7 million of revenue and a $0.25 million pretax loss. Acquisitions of Schrofftech and C Enterprises affect comparability with 2019.
- Nine-month gross margin pressure reflected lower project volume and fixed-cost absorption, product mix, and C Enterprises’ lower margins. Operating expenses rose year over year, including acquired-company costs, amortization and stock compensation; decreases in the Schrofftech earn-out valuation partly offset these expenses.
- Accounts receivable declined $7.14 million from October 31, 2019, contributing to operating cash flow and cash growth. Inventory increased to $9.25 million from $8.25 million.
Outlook, risks and other items
- Management expects the COVID-related economic slowdown and sales decline to persist through at least the remainder of 2020. It provided no specific revenue or earnings guidance.
- Management believes available assets, expected operating cash flow and PPP funds should cover liquidity needs for at least 12 months, while acknowledging uncertainty from the pandemic. Backlog was $5.7 million, down from $6.1 million at October 31, 2019; orders may be cancelled and future demand is difficult to predict.
- The company anticipates most PPP borrowing will qualify for forgiveness. Any unforgiven balance has a two-year term and 1% fixed interest. Forgiveness had not been established in this filing.
- The Schrofftech acquisition includes potential earn-out payments up to $2.4 million through October 31, 2021. The liability was valued at $0.56 million at July 31, down from $1.25 million initially; future remeasurement depends on results and assumptions.
- COVID-19 may further disrupt operations, supply chains and customer demand, increase costs, weaken collections and contribute to material goodwill impairment. No goodwill impairment indicators were identified at July 31, 2020, but management said future impairment remained possible.
- Customer concentration is material: two distributors represented 18% and 13% of quarterly sales and 21% and 14% of receivables at period end. The filing says customer agreements do not require minimum purchases. Cash balances exceeded federal insurance limits by approximately $14 million.
- The company paid $0.39 million of dividends during the nine months and none in the quarter. It reported no material litigation outside the ordinary course and concluded disclosure controls were effective.
Key facts investors should verify
- Whether PPP loan forgiveness was obtained and how any remaining balance is repaid.
- Whether project-based demand, backlog conversion and Custom Cabling profitability recover after the reported COVID-related disruption.
- Schrofftech’s operating performance and changes in the earn-out liability, including potential cash payments.
- Customer concentration, receivable collections and the effect of any further decline in demand on liquidity and goodwill valuations.