RF Industries, Ltd. — Form 10-K Summary
Period note: Although the request metadata says “2020 Q4,” this filing reports the fiscal year ended October 31, 2021, with fiscal 2020 as the comparable year. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
RF Industries designs, manufactures, markets and distributes interconnect products, including coaxial and fiber-optic cables and connectors, custom cable assemblies and wiring harnesses, and telecommunications cooling systems and small-cell enclosures. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The company says it serves telecommunications and wireless infrastructure markets as well as other OEM and industrial markets.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $57.424 million | $43.044 million |
| Gross profit / gross margin | $17.768 million / 30.9% | $11.566 million / 26.9% |
| Operating income (loss) | $4.415 million | $(0.403) million |
| Income (loss) before tax | $7.217 million | $(0.448) million |
| Net income (loss) | $6.181 million | $(0.081) million |
| Diluted EPS | $0.61 | $(0.01) |
| Cash from (used in) operations | $(3.122) million | $4.547 million |
- Sales rose 33%. Custom Cabling revenue grew 47% to $41.802 million; RF Connector revenue grew 7% to $15.622 million. Custom Cabling represented about 73% of sales and RF Connector about 27%.
- Gross margin improved year over year. Management attributed much of the increase to the Employee Retention Credit (ERC); excluding its benefit, FY2021 gross profit would have been $15.2 million and gross margin 26.4%.
- Other income was $2.802 million, primarily from forgiveness of approximately $2.8 million of Paycheck Protection Program (PPP) loans. Management said the ERC and PPP forgiveness were important to achieving full-year net income; operations had losses in the first three quarters and returned to profitability in Q4.
- Operating cash use reflected working-capital investment, including a $7.882 million increase in trade receivables and a $2.592 million increase in inventory. Cash and cash equivalents declined to $13.053 million from $15.797 million.
- At October 31, 2021, current assets were $40.648 million, current liabilities $9.370 million, working capital $31.278 million and the current ratio approximately 4.3:1. Total assets were $49.648 million and stockholders’ equity was $39.603 million.
- The PPP loans were forgiven and no PPP balance remained at year-end. The company had no outstanding balance on its former $5 million line of credit, which it closed in December 2020. Operating lease liabilities totaled approximately $1.507 million; the filing reports no other year-end borrowing balance.
Material changes versus the prior comparable period
- Revenue and operating results recovered from FY2020, when the company recorded an operating loss and a small net loss. Management attributed the sales rebound mainly to increased wireless-carrier spending and fiber-optic cable sales for 4G and 5G network builds.
- Backlog increased to approximately $33.3 million at October 31, 2021 from $6.3 million a year earlier. The company cautions that orders can be delayed or canceled and backlog may not predict future demand.
- Cash from operations shifted from $4.547 million provided in FY2020 to $3.122 million used in FY2021, despite higher net income, primarily due to receivables and inventory growth.
- FY2021 sales were concentrated among two customers: a wireless carrier accounted for about 21% and a distributor about 11%. The same customers represented 28% and 8% of year-end receivables, respectively.
Outlook, commentary, risks and unusual items
- The filing provides no specific numerical sales or earnings guidance. Management said existing current assets and expected operating cash generation should cover anticipated needs for at least 12 months from the report date, while noting that the proposed Microlab acquisition could materially affect liquidity.
- On December 16, 2021, the company agreed to acquire Microlab/FXR LLC for an estimated $24.25 million in cash, subject to closing adjustments and conditions, including seller shareholder approval. It expected closing by the end of April 2022, with a possible 30-day extension. Funding was expected from cash on hand and a proposed credit facility of up to $20 million; the bank commitment was nonbinding and financing was not yet completed.
- Management identified risks from COVID-19 effects, supply-chain and shipping disruptions, higher raw-material and labor costs, and reliance on Asian contract manufacturers. Fixed-price, longer-term customer contracts may prevent passing cost increases through, potentially pressuring margins.
- Other disclosed risks include dependence on wireless and broadband capital spending, customer and distributor concentration, competition, technological change, and potential goodwill or intangible-asset impairment. One vendor represented 26% of inventory purchases in FY2021.
- The financial statements received an unqualified audit opinion. The auditor identified goodwill and indefinite-lived trade names associated with Schrofftech as a critical audit matter, citing sensitivity to forecast and valuation assumptions. No goodwill impairment was recorded.
- Management reported effective disclosure controls and internal control over financial reporting as of October 31, 2021. The auditor did not attest to internal control effectiveness, consistent with the company’s smaller-reporting-company status.
Important facts for investors to verify
- How much FY2021 earnings depended on PPP forgiveness and the ERC, including collection and timing of the $1.774 million ERC receivable.
- Whether receivables are collected and the elevated backlog converts to shipments and revenue without material delays or cancellations.
- Final Microlab purchase price, shareholder approval, closing status, financing terms, covenants, collateral and post-acquisition liquidity.
- Whether supply, freight, raw-material and labor cost pressures persist, and the extent to which pricing can offset them.
- Ongoing customer and supplier concentration, particularly the major customers’ purchasing and payment patterns and the vendor responsible for 26% of purchases.