RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended July 31, 2018, not 2017 as indicated in the request metadata. RF Industries manufactures and markets interconnect products and systems through its RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly segments.
Financial performance and position
| Metric | Three months ended July 31, 2018 | Nine months ended July 31, 2018 |
|---|---|---|
| Net sales | $13.85 million | $46.57 million |
| Gross profit / margin | $4.56 million / 33% | $15.71 million / 34% |
| Operating income | $2.14 million | $6.71 million |
| Net income | $1.73 million | $5.39 million |
| Diluted EPS | $0.18 | $0.57 |
- For the nine months, operating cash flow was $5.19 million; investing cash use was $0.11 million and financing cash provided was $0.47 million. Cash increased $5.55 million to $11.59 million.
- At July 31, 2018, current assets were $25.19 million and current liabilities $5.33 million, with working capital of $19.9 million and a current ratio of approximately 4.8:1. Total assets were $32.91 million and total liabilities $5.52 million.
- The company reported no outstanding borrowed debt. It paid $0.54 million in dividends in the nine-month period and received $1.02 million from stock-option exercises.
Changes versus the prior comparable period
- Third-quarter sales rose 77% year over year; nine-month sales rose 111%. Custom Cabling drove nearly all of the increase, with nine-month segment sales up 173%; RF Connector sales increased 5%.
- Gross margin improved from 28% to 33% for the quarter and from 27% to 34% for the nine-month period. Management attributed the improvement mainly to higher Custom Cabling volume spreading fixed manufacturing costs over more sales.
- Nine-month operating results improved from a $0.11 million operating loss in 2017 to $6.71 million of operating income in 2018. Nine-month net income was $5.39 million versus $0.08 million in 2017.
- Custom Cabling generated $6.75 million of nine-month pretax income, compared with a $0.35 million loss a year earlier. RF Connector reported a $0.03 million pretax loss versus $0.24 million of income, which management attributed primarily to accrued bonuses.
Outlook, risks, contingencies and notable items
- Management said cash, current assets and expected operating cash flows should meet anticipated needs for at least 12 months. Backlog was $7.8 million at July 31, down from $9.5 million at April 30; orders may be cancelled, and the company said its ability to predict future orders is limited. No specific earnings or revenue guidance was provided.
- Customer concentration is significant: one distributor accounted for 56% of nine-month sales and 53% of receivables at July 31. Customer agreements have no minimum purchase commitments. One vendor represented 41% of nine-month inventory purchases.
- Approximately $10.5 million of cash exceeded federally insured limits. Management was evaluating import-tariff impacts, which it did not then expect to be material but said were uncertain.
- The company paid the remaining $0.21 million Rel-Tech earn-out in August 2018. The board declared a $0.02-per-share dividend on September 5, payable October 15, 2018.
- The Tax Act reduced the federal corporate rate; the company recorded a $0.041 million deferred-tax adjustment and a $0.163 million stock-option tax benefit for the nine months. It said its Tax Act analysis remained subject to refinement through the measurement period ending December 22, 2018.
- The filing reports no material legal proceeding outside the ordinary course and no material change to previously disclosed risk factors. 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: the filing itself is for the quarter ended July 31, 2018, notwithstanding the “2017 Q3” request metadata.
- Assess the sustainability of the sharp Custom Cabling growth, margins and backlog, including dependence on project orders and the concentrated distributor relationship.
- Monitor customer and supplier concentration, receivables and inventory as sales scale, and cash balances above insured limits.
- Review subsequent financial statements for the earn-out payment, dividend, tariff effects and any final Tax Act adjustments.
- Consider that interim results are unaudited and management cautions that nine-month results are not necessarily indicative of full-year results.