RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing is for the quarter ended July 31, 2023, and includes year-to-date results for the nine months ended that date. Although the request metadata identifies “2022 Q3,” the filing itself reports fiscal 2023 Q3.
Business context
RF Industries manufactures and markets RF interconnect products, cable assemblies, custom cabling, cooling systems and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The statements are unaudited and include Microlab, acquired March 1, 2022.
Financial performance
Amounts below are in millions of dollars, except per-share figures and percentages.
| Metric | Three months ended July 31, 2023 | Three months ended July 31, 2022 | Nine months ended July 31, 2023 | Nine months ended July 31, 2022 |
|---|---|---|---|---|
| Net sales | $15.652 | $23.842 | $56.294 | $62.265 |
| Gross profit | $3.824 | $7.248 | $15.031 | $17.412 |
| Gross margin | 24.4% | 30.4% | 26.7% | 28.0% |
| Operating income (loss) | $(2.010) | $1.088 | $(2.690) | $1.473 |
| Net income (loss) | $(1.645) | $0.771 | $(2.226) | $0.997 |
| Diluted EPS | $(0.16) | $0.08 | $(0.22) | $0.10 |
| Operating cash flow | Not separately provided | Not separately provided | $2.574 | $0.596 |
- At July 31, 2023, cash was $4.063 million, working capital was $22.8 million, and the current ratio was approximately 2.9:1. Total assets were $78.056 million and stockholders’ equity was $40.404 million.
- Debt included $13.768 million outstanding under the Term Loan and $1.0 million drawn on the revolving facility. The balance sheet reports $2.424 million of current Term Loan and $11.325 million of long-term Term Loan, net of debt issuance costs. Operating lease liabilities totaled $15.694 million.
- Year-to-date operating cash flow was positive, but cash declined by $0.469 million to $4.063 million. Operating cash flow included substantial working-capital effects, including receivables collections and tenant-improvement/ERC receipts, partly offset by lower accrued expenses and the net loss. Capital expenditures were $2.311 million and Term Loan payments were $1.818 million.
Changes versus prior comparable periods
- Quarterly sales fell 34% year over year. Custom Cabling sales declined $5.4 million, primarily on lower hybrid-fiber cable sales to wireless carriers and lower small-cell sales; RF Connector sales fell $2.7 million, primarily due to fewer carrier projects using approved RF components.
- Nine-month sales declined 9.6%. Custom Cabling sales fell 23.6% to $30.8 million amid slower wireless network deployments. RF Connector sales rose 16.4% to $25.5 million, primarily reflecting Microlab being included for a longer period.
- Both segments moved from pretax income in the prior-year quarter and nine-month period to pretax losses in 2023. The quarterly segment losses were $1.1 million for RF Connector and $0.7 million for Custom Cabling.
- Year-to-date operating cash flow increased from $0.596 million to $2.574 million. Cash at period-end was $4.063 million versus $5.086 million a year earlier.
Outlook, risks and unusual items
- Credit covenant breach and waiver: At July 31, the company was not compliant with its debt-to-EBITDA and fixed-charge-coverage covenants. On September 12, 2023, Bank of America granted a waiver for the July breach and suspended those tests through the quarter ending July 31, 2024; testing is scheduled to resume October 31, 2024. The amendment imposes liquidity and minimum EBITDA requirements and a $50,000 waiver fee. The filing does not provide a formal revenue or earnings forecast.
- Liquidity and going concern: Management cited operating losses and cost-reduction actions, including facility consolidation. It believes cash, revolver availability and planned actions are sufficient to support the company as a going concern for at least 12 months from the financial statements’ issuance date. This depends on future profitability, cash generation and funding availability.
- Demand and backlog: Backlog fell to $17.2 million from $27.8 million at October 31, 2022, primarily due to shipments of hybrid-fiber cable orders. Orders may be delayed or cancelled, and management says future demand is difficult to predict.
- Customer and supplier concentration: A distributor represented 12% of quarterly sales and 12% of receivables. A wireless carrier represented 13% of nine-month sales. Significant customers have no minimum-purchase obligations. One vendor accounted for 17% of nine-month inventory purchases.
- Expenses and impairment: The quarter included a $194,000 one-time charge related to facility moves, systems implementation and severance. Management tested Schrofftech for impairment after weaker results; estimated fair value exceeded carrying value, so no impairment was recorded. Future impairment remains possible if assumptions or performance change.
- Lease amendment: A July 2023 lease amendment provides for up to $1.0 million of additional tenant improvements and higher rent, subject to conditions and a finalized budget. The company had not included the amendment in its July 31 financial statements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material non-ordinary-course legal proceeding and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the company meets the amended liquidity and EBITDA requirements, and whether covenant compliance is restored when testing resumes.
- Cash generation after considering working-capital timing, tenant-improvement/ERC receipts, capital spending and scheduled debt service.
- Recovery in wireless carrier deployments, segment margins, and the sustainability of the $17.2 million backlog.
- Customer concentration, order cancellation exposure, and dependence on the significant inventory vendor.
- The final cost, rent impact and conditions of the San Diego office build-out and managed-client arrangement.
- Whether continued operating losses or revised forecasts trigger impairment charges or create additional financing needs.