RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2020. The company manufactures and markets interconnect products, cabling, and related systems for telecommunications and other markets. Amounts below are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $12.414 million | $10.647 million |
| Gross profit / margin | $3.253 million / 26.2% | $3.145 million / 29.5% |
| Operating income | $1,000 | $786,000 |
| Income before taxes | $12,000 | $808,000 |
| Net income | $26,000 | $640,000 |
| Diluted EPS | $0.00 | $0.07 |
| Operating cash flow | $5.606 million | $(2.401) million |
- Sales increased 17% year over year, but reported comparison includes acquired businesses not present in the prior-year quarter. Gross margin fell 3.3 percentage points, largely from product mix, lower-margin C Enterprises sales, and higher labor costs.
- Operating expenses rose to $3.252 million from $2.359 million, including higher engineering and selling and general costs. The Custom Cabling segment recorded a $281,000 pretax loss, versus $506,000 pretax income a year earlier; RF Connector pretax income was $282,000, versus $280,000.
- Operating cash flow benefited substantially from a $6.711 million reduction in receivables and a $638,000 inventory reduction. Investing cash outflow was $3.954 million, primarily the $3.901 million net cash purchase of Schrofftech. Cash increased $1.850 million to $14.390 million.
Balance sheet, liquidity, and capital
- At January 31, 2020, cash was $14.390 million, working capital was $23.8 million, and the current ratio was approximately 5.4:1. Current assets were $29.246 million and current liabilities $5.464 million.
- Total liabilities were $7.888 million; no borrowings were outstanding on the new $5 million revolving credit facility. The company reported compliance with its covenants. The facility is secured, bears interest at 2% plus daily floating LIBOR, and matures December 1, 2021.
- Operating lease liabilities totaled $2.124 million, including $933,000 classified as current. Adoption of the lease standard in November 2019 initially added approximately $2.3 million of right-of-use assets and $2.4 million of lease liabilities.
- The company paid quarterly dividends of $0.02 per share, totaling $193,000. On March 5, 2020, the board declared another $0.02-per-share dividend payable April 15, 2020.
Material changes, outlook, and risks
- Schrofftech was acquired effective November 1, 2019 for $4 million cash, with potential earn-out payments of up to $2.4 million. It contributed $1.1 million of revenue and $83,000 of pretax income in the quarter. The recorded earn-out liability was $1.215 million. Purchase-price allocations were preliminary.
- Management attributed Custom Cabling growth to acquired Schrofftech and C Enterprises, while sales in continuing divisions declined, particularly due to lower hybrid fiber cable orders in the wireless market. Backlog was $5.0 million, down from $6.1 million at October 31, 2019; orders may be canceled.
- Management said cash and expected operating cash generation, including backlog, were expected to meet liquidity and capital needs for at least 12 months from filing. No specific earnings or revenue guidance was provided. Management did not anticipate material capital equipment needs in the next 12 months.
- The filing warned that COVID-19-related disruptions among offshore suppliers could delay shipments or cause lost or delayed revenue. The company said the overall effect on its business, liquidity, and capital resources could not yet be determined.
- Customer concentration remains a risk: three customers represented approximately 17%, 11%, and 11% of quarterly sales. Their agreements do not require minimum purchases. Approximately $13.1 million of cash exceeded federally insured limits.
- No material non-ordinary-course legal proceeding was reported. Disclosure controls were assessed as effective; the company was integrating Schrofftech’s operations and controls.
Important facts for investors to verify
- How much of reported sales growth and future performance reflects acquired businesses versus continuing operations, and whether Custom Cabling margins recover.
- Schrofftech’s final asset valuation, performance against earn-out targets, and potential future earn-out remeasurement expense or payment.
- Whether COVID-19 or other supply-chain and customer disruptions affect orders, deliveries, backlog, or cash generation.
- Whether major customers maintain purchasing levels and whether the company remains within credit-facility covenants.
- Whether receivables collections and operating cash flow remain strong after the quarter’s unusually large collection of prior-period receivables.