Business context and reporting period
RF Industries, Ltd. designs, manufactures and markets RF connectors, cable assemblies, and custom copper and fiber cabling products. The filing covers the three months ended January 31, 2019 (fiscal 2019 first quarter); although the request metadata says “2018 Q1,” the filing itself compares this quarter with the three months ended January 31, 2018. The 2018 comparison is presented with Comnet, sold on October 31, 2018, classified as discontinued operations.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $10.647 | $7.966 |
| Gross profit / margin | $3.145 / 29.5% | $2.463 / 30.9% |
| Operating income | $0.786 | $0.358 |
| Continuing-operations income before tax | $0.808 | $0.360 |
| Continuing-operations net income | $0.640 | $0.304 |
| Consolidated net income | $0.640 | $0.454, including $0.150 from discontinued operations |
| Diluted EPS | $0.07 | $0.05 |
| Operating cash flow, continuing operations | $(2.401) | $(0.220) |
Sales rose 34% year over year. Custom Cabling sales were $7.389 million, up 38%; RF Connector sales were $3.258 million, up 24%. Gross margin declined to about 30% from 31%, principally because of higher Custom Cabling outsourcing costs. Selling and general expense increased to $2.039 million from $1.784 million, but declined as a share of sales to 19% from 22%. The tax provision was $0.168 million, or 21% of pretax income, versus $0.056 million, or 16%.
Cash and cash equivalents were $14.016 million at January 31, versus $16.334 million at October 31, 2018. Current assets were $28.599 million and current liabilities $3.803 million, for working capital of approximately $24.8 million and a current ratio of about 7.5:1. The company reported no outstanding borrowings. Operating cash use primarily reflected higher accounts receivable and inventory and lower accrued expenses, including payment of prior-year bonuses. Capital expenditures were $0.073 million; dividends paid were $0.186 million. Total assets were $32.507 million and stockholders’ equity $28.693 million.
Material changes and unusual items
- Sales growth was driven by Custom Cabling project work in OEM and wireless carrier markets, along with stronger traditional business; RF Connector sales also increased.
- RF Connector segment pretax income improved to $0.280 million from a $0.157 million loss. Custom Cabling segment pretax income was $0.506 million versus $0.514 million.
- Operating cash use increased year over year, with receivables up $1.383 million and inventory up $1.056 million during the quarter.
- Two customers accounted for approximately 38% and 14% of current-quarter sales and 30% and 22% of quarter-end receivables, respectively. Two vendors each represented 17% of inventory purchases.
- The company adopted ASC 606 using the modified retrospective method and reported no material revenue impact or retained-earnings adjustment.
Outlook, risks and contingencies
Management said existing assets, expected operating cash generation and backlog should fund anticipated needs for at least 12 months. Backlog was approximately $11 million, substantially unchanged from October 31, 2018; management cautioned that orders are difficult to predict and may be canceled. No formal earnings or revenue guidance was provided. Management said it did not expect material capital-equipment needs over the next 12 months.
On March 11, 2019, the company announced a binding agreement to acquire the assets of C Enterprises, a cable-products business; the filing does not provide a purchase price, and management expected the cash outlay not to materially affect liquidity. A $0.02-per-share quarterly dividend was declared March 8, payable April 15, 2019. Management was evaluating recently enacted import tariffs and did not expect a material impact, while acknowledging uncertainty. Other risks include customer concentration, inventory valuation, and possible order reductions or cancellations. The filing reports no material change to previously disclosed risk factors, no material non-ordinary-course legal proceeding, and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth, the $11 million backlog and customer demand persist, given order variability and concentrated customer exposure.
- Whether gross margins recover from outsourcing costs and whether working-capital investment converts into operating cash flow.
- Purchase price, closing conditions, financing and integration implications of the C Enterprises acquisition.
- Potential effects of import tariffs, vendor concentration and inventory obsolescence.
- Dividend continuity and the effects of option exercises and other share dilution.