RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended April 30, 2021. Although the request metadata says “2020 Q2,” the filing itself is for fiscal 2021 Q2.
Business context
RF Industries manufactures and markets interconnect products and systems, including cable assemblies, connectors, wiring harnesses, cooling systems, and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The Custom Cabling segment is more dependent on larger, project-based orders; RF Connector sales are generally more standardized.
Financial highlights
| Metric | Three months ended Apr. 30, 2021 | Six months ended Apr. 30, 2021 |
|---|---|---|
| Net sales | $11.1 million, up 6% year over year | $21.1 million, down 7% |
| Gross profit / margin | $4.8 million / 43.1% | $7.4 million / 35.0% |
| Operating income | $2.7 million | $2.1 million |
| Net income | $4.8 million; diluted EPS $0.48 | $4.4 million; diluted EPS $0.44 |
| Cash from operating activities | Not presented separately for the quarter | Cash used of $1.4 million |
Prior-year comparable periods recorded net losses of $0.2 million in both the quarter and six-month period. The current-period results include approximately $2.8 million of other income from forgiveness of the company’s PPP loans. The Employee Retention Credit (ERC) also materially affected reported costs and gross profit: management said gross margin excluding the ERC benefit would have been 27.1% for the quarter and 26.6% for the six-month period, versus 24.9% and 25.6%, respectively, in the prior-year periods.
Quarterly sales growth reflected a $0.9 million increase in Custom Cabling sales, partly offset by a $0.2 million decline in RF Connector sales. Six-month sales fell primarily because of weaker project-based Custom Cabling sales in the first quarter. Management attributed the improvement in gross profit partly to ERC credits reducing labor costs.
Financial position, liquidity, and debt
- At April 30, 2021, cash and cash equivalents were $14.8 million, down from $15.8 million at October 31, 2020. Total assets were $42.8 million and total liabilities were $5.5 million.
- Working capital was $29.2 million and the current ratio was approximately 6.7:1. The company reported no outstanding borrowings; its $5.0 million revolving credit facility was closed in December 2020, and it currently has no credit facility available.
- The approximately $2.8 million of PPP loans, including interest, was fully forgiven in February 2021. Operating lease liabilities totaled approximately $1.0 million.
- Six-month operating cash use was $1.4 million despite net income of $4.4 million, mainly reflecting increased inventory and other current assets. Other current assets included a $2.353 million ERC receivable; the company also reported approximately $0.7 million of expected tax refunds.
- Backlog was $15.6 million at April 30, 2021, compared with $6.3 million at October 31, 2020. Management noted that customer purchase orders can be cancelled.
Outlook, risks, and unusual items
Management believes available assets and expected operating cash generation, including from backlog, should fund liquidity and capital needs for at least the next 12 months, while acknowledging uncertainty from COVID-19. It expected Custom Cabling sales to continue increasing during the remainder of fiscal 2021; the filing provides no formal quantified earnings or revenue guidance. Management did not anticipate material additional capital equipment spending over the next 12 months and noted possible future acquisitions as a use of capital.
COVID-19 continued to affect staffing, customer demand, supply chains, and operating costs, with particular disruption at Northeast operations. The company warned that further pandemic-related disruption could materially affect sales, collections, operations, financial position, and cash flows. Two distributors represented approximately 12% and 11% of quarterly sales and 14% and 13% of receivables, respectively; their agreements have no minimum purchase obligations. Approximately $13.4 million of cash was above federally insured limits.
The filing reported no material litigation outside the ordinary course of business, no material changes in internal control over financial reporting, and effective disclosure controls and procedures. Management identified no goodwill or indefinite-lived intangible impairment indicators at April 30, 2021, but cautioned that future impairment could arise as pandemic effects become clearer.
Key facts investors should verify
- How much future profitability depends on ERC benefits and the one-time PPP loan forgiveness, and the timing and receipt of the remaining ERC receivable.
- Whether the $15.6 million backlog converts to revenue, given project-order volatility and customer cancellation rights.
- Whether Custom Cabling sales recover as management expected, and whether reported margin improvement persists excluding ERC credits.
- Exposure to the two major distributors, cash balances above insured limits, and the absence of an available credit facility.
- Potential effects of continuing COVID-19 disruption, including supply constraints, cost increases, customer demand, and cash collections.