RF Industries, Ltd. — Form 10-Q Summary
Reporting period: The filing covers the three months ended January 31, 2023, RF Industries’ fiscal 2023 first quarter—not calendar 2022 Q1. Comparisons are with the three months ended January 31, 2022. Financial statement amounts below are in thousands of dollars unless otherwise noted.
Business context
RF Industries manufactures and markets interconnect products and systems through its RF Connector and Cable Assembly and Custom Cabling segments. The quarter’s results include Microlab, acquired March 1, 2022; the comparable 2022 quarter does not. Microlab contributed $5.1 million of reported-quarter sales, limiting direct comparability.
Financial performance
| Metric | Three months ended Jan. 31, 2023 | Three months ended Jan. 31, 2022 |
|---|---|---|
| Net sales | $18,343 | $16,918 |
| Gross profit / gross margin | $5,086 / 27.7% | $4,084 / 24.1% |
| Operating loss | $(1,169) | $(362) |
| Net loss | $(1,162) | $(277) |
| Diluted loss per share | $(0.11) | $(0.03) |
| Cash provided by operating activities | $889 | $557 |
| Capital expenditures | $(1,130) | $(103) |
Sales increased 8.4%, but the net loss widened. Gross margin improved, while operating expenses rose to $6.3 million from $4.4 million, including higher engineering and selling and general expenses.
Segments and material changes
- RF Connector: Sales were $9.1 million versus $3.9 million; pretax income was $246,000 versus $56,000. The sales increase primarily reflects Microlab, which contributed $5.1 million.
- Custom Cabling: Sales declined to $9.3 million from $13.0 million, and the segment recorded a $921,000 pretax loss versus $314,000 pretax income. Management attributed the decline chiefly to lower hybrid fiber cable and small-cell sales to Tier-1 wireless customers.
- Reported consolidated sales growth therefore masks a sharp decline in Custom Cabling and the contribution from the acquisition. Unaudited pro forma information, assuming Microlab had been acquired before the comparison period, showed 2022-quarter revenue of $22.0 million and net income of $839,000, versus 2023-quarter revenue of $18.3 million and a net loss of $1.2 million.
Liquidity, debt and cash flow
At January 31, 2023, cash was $3.8 million, working capital was $25.1 million, and the current ratio was approximately 2.5:1. Cash decreased $762,000 during the quarter. Operating cash generation of $889,000 was more than offset by $1.1 million of capital expenditures and $606,000 of term-loan payments.
The balance sheet reported $2.4 million of current term-loan debt and $12.5 million of long-term term-loan debt, net of issuance costs. The company reported no revolving-credit borrowings; $3.0 million is available under the revolving facility. The term loan carries a stated rate of 3.76% and matures March 1, 2027. The credit facility includes leverage, fixed-charge-coverage and other covenants.
Outlook, risks and other notable items
- Management said existing assets, expected operating cash flow and backlog, together with the available revolver, should be sufficient for liquidity needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Backlog was $24.5 million, down from $27.8 million at October 31, 2022, primarily due to shipments of hybrid fiber cables. Orders may be cancelled, and management noted limited ability to predict future orders.
- One wireless carrier represented 15% of sales and 16% of net receivables, compared with 32% and 37%, respectively, in the prior-year quarter. Its agreements have no minimum purchase requirements; a reduction or loss of business could materially affect results.
- Two vendors accounted for 12% and 10% of inventory purchases. Cash balances included approximately $2.6 million above federally insured limits.
- Selling and general expense included $50,000 of severance and $444,000 of additional rent expense related to lease accounting, of which $387,000 was noncash. The company recorded a $160,000 income-tax benefit; the effective rate was 12.3%, versus 22.3%.
- Operating lease liabilities totaled approximately $16.6 million, including $1.7 million current. Management identified no material change in risk factors from its latest Form 10-K. It reported no material non-ordinary-course legal proceeding and concluded disclosure controls were effective.
Key facts for investors to verify
- How much of future RF Connector growth and profitability is recurring Microlab business, and how does it compare with the acquisition pro forma results?
- Whether Custom Cabling sales recover, particularly orders for hybrid fiber cables and small-cell products, and how backlog converts to revenue.
- Whether margins and operating expenses improve while the company services its term loan and meets its credit-facility covenants.
- Whether customer concentration, vendor supply exposure, and the decline in cash create material operating or liquidity pressure.