Business context and reporting period
RF Industries, Ltd. designs, manufactures and markets cable, connector and interconnect products, including custom cabling and medical connectivity solutions. This Form 10-Q covers the quarter and six months ended April 30, 2014. The request metadata says “2013 Q2,” but the filing itself reports fiscal 2014 results.
Financial performance
| Metric | Three months ended Apr. 30, 2014 | Three months ended Apr. 30, 2013 | Six months ended Apr. 30, 2014 | Six months ended Apr. 30, 2013 |
|---|---|---|---|---|
| Net sales | $5.764 million | $8.847 million | $11.614 million | $18.742 million |
| Gross profit / margin | $2.752 million / 48% | $3.952 million / 45% | $5.334 million / 46% | $8.517 million / 45% |
| Operating income | $763,000 | $1.804 million | $1.102 million | $3.822 million |
| Continuing-operations income | $460,000 | $1.288 million | $723,000 | $2.745 million |
| Net income | $478,000 | $1.178 million | $742,000 | $2.660 million |
| Diluted EPS | $0.05 | $0.14 | $0.08 | $0.32 |
- Six-month operating cash flow was $2.0 million, versus $1.749 million a year earlier. Capital expenditures were $59,000; dividends paid were $1.145 million. Cash rose to $13.416 million from $11.881 million at October 31, 2013.
- At April 30, 2014, current assets were $22.690 million and current liabilities $1.513 million; working capital was $21.2 million and the current ratio approximately 15:1. Total liabilities were $2.463 million. The company reported no outstanding borrowings.
- A $5.0 million secured line of credit was established in March 2014; none was drawn at quarter-end. Its stated rate is 3% plus LIBOR, and principal is due June 30, 2016.
Material changes and management commentary
- Quarterly sales fell 35% and six-month sales fell 38%. The principal driver was Cables Unlimited, where sales declined 61% in both comparisons as demand receded for a project-based cabling product used in telecommunications upgrades.
- RF Connector and Cable Assembly sales fell 7% for the quarter and 15% for the six months, which management attributed to industry-wide softer demand. Medical Cabling and Interconnector sales fell 14% for the quarter and 4% for the six months, reflecting lower orders from a significant customer.
- Gross margin improved, principally because a larger share of sales came from the higher-margin RF Connector and Cable Assembly segment. For the six-month period, that benefit was partly offset by lower Cables Unlimited margins from reduced production volume, competition and customer mix.
- Operating income and net income declined substantially year over year. Lower sales drove the decline; lower selling and general expense partly offset it. Six-month selling and general expense also benefited from the absence of prior-year bonuses and legal and consulting costs. Engineering expense increased 18% over the six-month comparison.
- Management expects a decline in medical-segment revenue in subsequent quarters due to the customer slowdown. Future demand for the Cables Unlimited project product depends on cellular-site upgrades and competing products and, management said, cannot be accurately estimated. No numerical earnings or revenue guidance is provided.
Risks, contingencies and unusual items
- One customer accounted for 33% of six-month sales (52% in the prior-year period) and 24% of receivables at April 30. The customer has no minimum purchase obligation; a reduction or loss of orders could materially affect results. A product line associated with a customer generated 13% of six-month sales and also has no minimum purchase commitment.
- Cash balances exceeded federal insurance limits by approximately $12.3 million. Three vendors represented 18%, 13% and 10% of six-month inventory purchases.
- In 2013, the company sold its RF Neulink and RadioMobile divisions for royalty arrangements. Continuing royalties contributed $39,000 of revenue and $18,000 of after-tax income from discontinued operations in the quarter; six-month amounts were $47,000 and $19,000, respectively.
- The effective tax rate was 40.3% for the quarter and 35.2% for six months, compared with 28.8% and 28.3% in the comparable periods. The company attributed the rate change primarily to reversals of compensation expense associated with disqualifying incentive-stock-option dispositions.
- The board authorized repurchases of up to 500,000 shares; none had been repurchased as of April 30. The company paid $0.07 per share in dividends in each of the first two fiscal quarters and declared another $0.07 dividend payable July 15, 2014.
- Management cited inventory valuation, doubtful accounts, goodwill and intangible-asset impairment, and stock-option valuation as areas involving significant estimates. No material changes to previously disclosed risk factors or material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period intended: the filing is for the quarter ended April 30, 2014, despite the request’s “2013 Q2” label.
- Track whether Cables Unlimited demand recovers and whether cellular-site upgrade activity supports future orders.
- Monitor sales and receivables concentration in the major customer and the medical segment’s significant customer.
- Assess the effect of lower volumes, competition and customer mix on segment margins and profitability.
- Review the terms and covenant requirements of the undrawn credit line, and the company’s cash exposure above insured limits.