RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2023. Although the request metadata says 2022 Q2, the filing covers fiscal 2023 Q2; comparisons are with the periods ended April 30, 2022. Financial figures below are in millions unless noted.
Business context and reporting period
RF Industries manufactures and markets interconnect products and systems, including RF connectors, cable assemblies, custom cabling, cooling systems and small-cell enclosures. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. Microlab, acquired March 1, 2022, is included in the RF Connector segment.
Financial performance and position
| Metric | Three months ended April 30, 2023 | Six months ended April 30, 2023 |
|---|---|---|
| Net sales | $22.298 ($21.505 in 2022) | $40.642 ($38.423 in 2022) |
| Gross profit / margin | $6.120 / 27.4% ($6.080 / 28.3% in 2022) | $11.207 / 27.6% ($10.164 / 26.5% in 2022) |
| Operating income (loss) | $0.489 ($0.746 in 2022) | ($0.680) ($0.384 income in 2022) |
| Net income (loss) | $0.581 ($0.503 in 2022); diluted EPS $0.06 ($0.05) | ($0.581) ($0.226 income in 2022); diluted EPS ($0.06) ($0.02) |
| Operating cash flow | Not presented by quarter | $2.224 provided (2022: $1.639 used) |
- At April 30, cash was $4.326, current assets $41.028 and current liabilities $15.892. The company reported working capital of $25.1 and a current ratio of about 2.6:1.
- Total liabilities were $42.314. The term-loan carrying amount was $14.353, including $2.424 current and $11.929 long-term; the note reports $14.374 borrowed. No revolver borrowings were outstanding at April 30. The company subsequently drew $1.0 under its $3.0 revolving facility for headquarters leasehold improvements.
- Operating lease liabilities totaled $16.185, including $1.692 current. Six-month capital expenditures were $1.303; term-loan payments were $1.212.
Material changes versus prior comparable periods
- Second-quarter sales increased 3.7%. RF Connector sales rose 16.0% to $8.7, primarily reflecting a full quarter of Microlab; Custom Cabling sales declined 2.9% to $13.6.
- For the six-month period, sales increased 5.7%, but segment trends diverged: RF Connector sales increased 55.3% to $17.7, primarily due to Microlab, while Custom Cabling sales fell 15.2% to $22.9.
- Six-month gross margin improved to 27.6% from 26.5%, but operating results shifted to a $0.680 loss from $0.384 income. Selling and general expense rose to $10.0 from $8.5; engineering expense rose to $1.8 from $1.3.
- Backlog fell to $18.9 at April 30 from $27.8 at October 31, 2022, largely due to shipments of hybrid fiber cables.
- Cash declined by $0.206 over the six months. Operating cash generation included a $4.026 benefit from changes in other current assets, primarily tenant-improvement reimbursements and employee retention credit receipts; accrued expenses used $3.441.
Outlook, risks and unusual items
- Management said existing assets, anticipated operating cash flows and available revolver capacity should meet liquidity needs for the next 12 months. No quantitative earnings or sales guidance was provided. Management cautioned that backlog is not a reliable predictor of future orders; customer purchase orders may be cancelled.
- A single wireless-carrier customer represented 20% of second-quarter sales and 24% of accounts receivable at April 30. The customer has no minimum purchase obligation, and reduced or cancelled orders could materially affect revenue and profits.
- Management attributed Custom Cabling weakness to reduced carrier spending, including lower small-cell, direct-air-cooling and hybrid-fiber-cable sales. That segment’s larger project orders can make revenue more volatile.
- Second-quarter selling and general expense included $70,000 of facility-move costs and $20,000 of ERP upgrades. Six-month expenses also included $50,000 severance and increased rent expense, including $387,000 described as non-cash lease-accounting expense.
- The six-month tax benefit was $0.324; management attributed the effective-tax-rate change principally to increased R&D credits and a forecast full-year loss. The company reported $0.182 of unrecognized tax benefits.
- Schrofftech’s results triggered an interim impairment analysis. The estimated fair value exceeded carrying value, and no impairment charge was reported; management noted that changed assumptions or circumstances could lead to future write-downs.
- The term loan is secured and subject to financial covenants. The filing describes the covenant terms but does not clearly state covenant compliance status. The company reported no material non-ordinary-course legal proceedings and no material changes to previously disclosed risk factors.
- On June 14, 2023, the board amended bylaws, including changes to advance-notice and proxy procedures, director-nomination eligibility and special-meeting thresholds.
Investor facts to verify
- Whether customer demand and backlog recover, particularly in Custom Cabling and carrier-related products.
- Microlab’s contribution to sustainable segment profitability, given acquisition-related cost effects and the RF Connector segment’s six-month loss.
- Cash conversion and working-capital movements, including collection of remaining employee retention credits and tenant-improvement reimbursements.
- Term-loan covenant compliance, debt repayment requirements and use of the revolver after the subsequent $1.0 draw.
- Exposure to the concentrated wireless-carrier customer and to key inventory vendors.
- Whether operating performance or forecast changes affect impairment assumptions, taxes or the ability to meet management’s 12-month liquidity expectation.