RF Industries, Ltd. — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2015, compared with fiscal 2014. Although the request metadata says “2014 Q4,” this filing reports full-year 2015 results, not a 2014 quarterly period.
Business context
RF Industries designs, manufactures and markets interconnect products, including coaxial and fiber-optic cables and connectors, custom cable assemblies, medical monitoring cables and data-center products. Its three reporting segments were RF Connector and Cable Assembly, Custom Cabling Manufacturing and Assembly, and Medical Cabling and Interconnector. Acquisitions added Comnet Telecom (included for all of fiscal 2015), Rel-Tech (included from June 1, 2015) and the CompPro product line. The company sold the Aviel division after year-end, on December 22, 2015.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $32.804 million | $23.115 million |
| Gross profit / margin | $11.267 million / 34% | $10.453 million / 45% |
| Operating income | $1.218 million | $2.266 million |
| Net income | $994,000 | $1.439 million |
| Basic / diluted EPS | $0.12 / $0.11 | $0.18 / $0.16 |
| Cash from operations | $168,000 | $4.494 million |
| Cash and cash equivalents at year-end | $7.595 million | $14.718 million |
| Working capital | $15.296 million | $21.077 million |
- Current assets were $19.657 million and current liabilities $4.361 million at year-end; the current ratio was approximately 4.5:1.
- The company reported no borrowed funds outstanding and had a fully available $5.0 million revolving credit line. Total liabilities were $5.881 million; these included deferred taxes and earn-out liabilities, not reported borrowings.
- Cash declined by $7.123 million, mainly reflecting $5.132 million of acquisition and product-line purchases and $2.382 million of dividends. Investing activities used $5.320 million; financing activities used $1.971 million.
- Fiscal 2015 dividends totaled $0.28 per share ($2.382 million). A further $0.07-per-share dividend was declared after year-end. Future dividends are at the board’s discretion.
- Segment sales: RF Connector and Cable Assembly, $11.710 million; Custom Cabling Manufacturing and Assembly, $19.198 million; Medical Cabling and Interconnector, $1.896 million. Segment pretax results were $887,000, a $234,000 loss, and $243,000, respectively.
Changes versus prior year
- Sales rose 42% ($9.689 million), principally because Comnet and Rel-Tech contributed $13.4 million of sales. Excluding those acquired businesses, sales from the other divisions fell by $3.7 million.
- RF Connector and Cable Assembly sales declined 11% to $11.7 million amid weaker industry demand. Cables Unlimited sales fell to $5.8 million from $7.2 million, reflecting lower OptiFlex and other fiber-optic orders. Medical segment sales decreased 30% to $1.9 million, primarily due to lower purchases by principal customers.
- Gross margin fell to 34% from 45%, driven by lower OptiFlex sales, fixed manufacturing costs spread over reduced RF-segment revenue, and the acquired businesses’ lower historical margins. Management expected aggregate margins to remain below historical levels as custom cabling became a larger share of sales.
- Operating income declined 46% and net income declined 31%, despite higher sales. Selling and general expenses increased 26% to $9.126 million, largely from the acquired businesses; engineering expense decreased slightly. The effective tax rate fell to approximately 23% from 42%, chiefly due to discrete state-tax reapportionment benefits.
Outlook, risks and notable items
- Management believed available current assets, expected operating cash generation and the unused credit line would meet liquidity needs for at least twelve months after October 31, 2015. No specific revenue or earnings guidance was provided.
- Key risks include exposure to telecommunications and wireless-industry demand; dependence on contract manufacturers, including suppliers in Asia; customer and distributor concentration; intense competition; and the execution, integration and earn-out costs of recent acquisitions. One customer accounted for 18% of FY2015 sales, down from 34% in FY2014, and had no minimum-purchase commitment.
- Operating cash flow was low relative to net income, with cash affected by working-capital movements and payments of liabilities. Inventory was $6.928 million, approximately one-third of current assets, and management noted potential write-off risk for excess or obsolete stock.
- Acquisition consideration included earn-outs of up to $1.36 million for Comnet and $800,000 for Rel-Tech. Earn-out valuations are remeasured quarterly and could affect selling, general and administrative expense. The company recorded a $318,000 credit from revaluing Comnet’s earn-out in FY2015.
- Cash of approximately $6.4 million exceeded federally insured limits at year-end. The company also disclosed dependence on a major customer and the risk that supplier interruptions or quality issues could disrupt operations.
- The Aviel assets were sold for $400,000: $150,000 cash at closing and a secured $250,000 note bearing 5% interest, payable over three years. Aviel had contributed $884,000 of FY2015 sales.
- The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting, but its assessment excluded Rel-Tech; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether acquired businesses sustain sales and improve profitability, and whether the lower consolidated gross-margin profile persists.
- Cash conversion and working-capital trends, particularly inventories, receivables, and payments of accrued and other liabilities.
- Performance of the major customer and concentration among customers, distributors and suppliers.
- Earn-out payments and valuation changes for Comnet and Rel-Tech, along with acquisition integration and amortization costs.
- Post-year-end effects of the Aviel sale and the company’s capital allocation, including future dividends and any additional acquisitions.
- Progress integrating Rel-Tech’s controls and inventory accounting into company-wide systems.