RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended April 30, 2016. The request metadata identifies 2015 Q2, but the filing itself reports 2016 Q2. Amounts are in thousands of dollars except per-share data.
Business context and results
RF Industries designs, manufactures and markets interconnect products, including cables, connectors and related assemblies. Its two reported segments were RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly. Rel-Tech, acquired in June 2015, contributed $1.8 million of quarterly and $3.3 million of six-month sales; it was not included in the prior-year comparable results.
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales, 2016 (2015) | $7,735 ($7,592), up 2% | $14,519 ($13,909), up 4% |
| Gross profit; gross margin | $2,352; 30% (2015: $2,857; 38%) | $4,375; 30% (2015: $5,085; 37%) |
| Operating income (loss) | $(78) (2015: $604) | $(649) (2015: $446) |
| Income (loss) from continuing operations | $69 (2015: $364) | $(247) (2015: $306) |
| Net income (loss) | $(113) (2015: $448); EPS $(0.01) (2015: $0.05) | $(467) (2015: $514); EPS $(0.05) (2015: $0.06) |
Cash flow, liquidity and balance sheet
- Six-month operating cash flow was negative $1,957, versus negative $784 a year earlier. Investing activities provided $279; financing activities used $896, including $787 of dividends and $157 to purchase treasury stock. Cash declined $2,574 to $5,021.
- At April 30, 2016, current assets were $17,684 and current liabilities $3,260; working capital was approximately $14.4 million and the current ratio approximately 5.4:1. Total assets were $29,890 and total liabilities $4,780.
- No borrowings were outstanding under the $5.0 million secured line of credit, which matures May 30, 2017. The company reported no outstanding indebtedness other than ordinary operating liabilities. Management said liquidity and expected operating cash generation should cover needs for at least 12 months.
- Cash of approximately $4.2 million exceeded federally insured limits. One customer represented 15% of six-month sales and 16% of receivables; its agreements impose no minimum purchase obligations.
Material changes and management commentary
- Reported sales growth was driven by Rel-Tech; excluding its $3.3 million contribution, sales from other divisions fell $2.7 million, or 19%, for the six months. RF Connector and Cable Assembly sales declined 33% to $4.0 million, reflecting softer industry demand and the Aviel sale. Comnet and Cables Unlimited also had lower sales.
- Gross margin fell as higher-margin connector and Optiflex sales declined and lower-margin Custom Cabling became a larger share of revenue. Management expects aggregate margins to remain below historical rates.
- Management plans to focus marketing on the Distributed Antenna Systems (DAS) market to grow core sales and margins. No quantified revenue or earnings guidance is provided.
- The company sold its Aviel division in December 2015. In March 2016 it announced closure of Bioconnect, its medical cabling operation; the six-month discontinued-operations loss was $220, including a $173 pretax inventory write-down.
- Acquisition earn-out revaluations reduced selling and general expense by a net $80 for the quarter; accrued earn-outs totaled $730 at April 30, including $353 current. The quarter also included a $100 bonus to the retiring former CEO. The six-month cash-flow discussion cites a $40 software write-off related to a new ERP system.
- The quarterly dividend was reduced from $0.07 to $0.02 per share to preserve capital for potential acquisitions and liquidity. The board subsequently declared another $0.02-per-share dividend, payable July 15, 2016.
Risks, contingencies and controls
Key risks include continued softness in RF cable and connector demand, margin pressure, inventory valuation judgments, reliance on a major customer without minimum purchase commitments, and acquisition-related earn-outs and integration. The filing reports no material change to previously disclosed risk factors and no legal proceedings to report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales and demand stabilize in the core RF business and at Comnet and Cables Unlimited, and whether DAS initiatives produce measurable growth.
- Whether gross margins can improve despite management’s expectation that they will remain below historical levels.
- How operating cash use, working-capital needs and dividend payments affect liquidity; confirm availability and covenant compliance of the $5.0 million credit line.
- Progress and remaining costs related to the Bioconnect closure, including the inventory write-down, and the final amounts payable under acquisition earn-outs.
- Reconcile the filing’s inconsistent descriptions of the quarterly effective tax rate: the financial statements show a $119 tax benefit on a $50 pretax loss, while the MD&A gives differing rate figures.