RF Industries, Ltd. — Form 10-Q
Business context and reporting period. The filing covers the three months ended January 31, 2016 (fiscal Q1 2016), compared with the three months ended January 31, 2015. RF Industries designs, manufactures and markets cable, connector and interconnect products. Its results include Comnet and Rel-Tech; Rel-Tech was acquired in June 2015. Unless otherwise noted, financial amounts below are in millions.
Financial results and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $6.984 | $6.894 |
| Gross profit / margin | $2.076 / 30% | $2.500 / 36% |
| Operating income (loss) | $(0.611) | $0.026 |
| Net income (loss) | $(0.353) | $0.065 |
| Net income (loss) per share, basic and diluted | $(0.04) | $0.01 |
| Cash used in operating activities | $(1.513) | $(0.637) |
| Cash and cash equivalents, quarter-end | $5.766 | $10.922 |
- Sales rose 1% year over year, but included $1.5 million from Rel-Tech, which was not owned in the comparable quarter. Excluding Rel-Tech, sales at the other divisions fell approximately $1.5 million.
- Gross margin declined six percentage points to 30%. Management attributed the decline to lower sales of higher-margin products and fixed manufacturing costs spread over lower revenue. It expects aggregate margins to remain below historical levels as the lower-margin Custom Cabling segment represents a greater share of sales.
- At January 31, 2016, total assets were $30.916 million and total liabilities were $5.438 million. Current assets were $18.419 million and current liabilities $3.918 million; management reported working capital of $14.5 million and a current ratio of about 4.7:1. The filing reports no borrowings under the $5 million line of credit, which was available in full at quarter-end and due June 30, 2016.
- Cash decreased $1.829 million during the quarter. Investing activities provided $0.274 million, primarily from Aviel asset and inventory sales, partly offset by $0.070 million of capital expenditures. Financing used $0.590 million, including $0.610 million of dividends.
Changes, outlook and risks
- Segment trends: Custom Cabling Manufacturing and Assembly sales were $4.828 million, including Rel-Tech, and the segment recorded a $0.118 million pretax loss. RF Connector and Cable Assembly sales fell 26% to $1.956 million, with a $0.415 million pretax loss. Medical Cabling and Interconnector sales declined 65% to $0.200 million, with a $0.078 million pretax loss.
- Management cited continuing industry-wide softness in RF cable and connector demand, declining Cables Unlimited Optiflex and other fiber optic orders, and lower Bioconnect purchases from principal customers. It said it intended to focus marketing on the Distributed Antenna Systems market.
- Aviel Electronics was sold on December 22, 2015, for $150,000 cash and a $250,000 secured note bearing 5% interest over three years; the sale generated an approximately $35,000 gain. On March 3, 2016, the board approved closing Bioconnect, the entire Medical Cabling and Interconnect segment, as part of efforts to exit underperforming non-core operations.
- The company paid $0.07 per share in dividends during the quarter. The board subsequently declared a $0.02-per-share dividend for April 15, 2016; management said the reduction was intended to preserve liquidity and support potential acquisitions. Management believed available assets, expected operating cash generation and the credit line would meet needs for at least 12 months, while cautioning that quarterly results are not necessarily indicative of full-year results.
- Key exposures include customer concentration: two customers represented about 14% and 13% of quarterly sales, and together about 32% of receivables. The company noted there are no minimum-purchase obligations with these customers. Cash balances exceeding federal insurance limits were approximately $4.9 million. Inventory valuation, acquisition earn-out estimates and impairment assessments require significant judgment. No material changes to previously disclosed risk factors were reported; no legal proceedings or market-risk items were reported.
- Other notable items: a $0.256 million income-tax benefit reduced the pretax loss; Rel-Tech contributed $1.5 million in sales and Comnet $2.2 million. The company recorded a $0.040 million loss on disposal of fixed assets, described in MD&A as a write-off of software related to a new ERP system. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification points
- Verify whether revenue and margins stabilize after the loss of Aviel and the planned Bioconnect closure, and whether DAS initiatives generate sales.
- Review the drivers of the $1.513 million operating cash outflow, including inventory and other asset investment, accrued-expense payments and acquisition-related obligations.
- Track customer concentration, receivable collectability, inventory reserves and the planned conversion of Rel-Tech’s inventory accounting method.
- Confirm the availability and renewal or replacement of the $5 million credit line, which was due June 30, 2016, and assess liquidity following the dividend reduction.
- Monitor Comnet and Rel-Tech earn-out liabilities and payments, as well as the Aviel note’s collection and repayment terms.