RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2014 (fiscal 2014 first quarter). The company designs, manufactures and markets cable, connector and interconnect products. Results are unaudited and cover continuing operations unless otherwise noted.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $5.85 million | $9.90 million |
| Gross profit / margin | $2.58 million / 44% | $4.57 million / 46% |
| Operating income | $339,000 | $2.02 million |
| Income from continuing operations | $264,000 | $1.46 million |
| Net income, including discontinued operations | $265,000 | $1.48 million |
| Diluted EPS | $0.03 | $0.19 |
| Cash from operating activities | $898,000 | $650,000 |
Sales declined 41% year over year. The Cables Unlimited segment fell 61% to $2.13 million, largely on weaker demand for a new cabling product; RF Connector and Cable Assembly sales fell 22% to $2.97 million amid softer industry demand. Medical Cabling and Interconnector sales rose 9% to $751,000. Gross margin declined mainly because lower Cables Unlimited sales spread fixed manufacturing costs across less revenue, alongside pricing pressure and a customer mix change. Engineering and selling/general expenses fell 11% and 12%, respectively. The prior-year quarter included senior-management bonuses and higher legal and consulting costs.
Cash and cash equivalents were $12.78 million at quarter-end, versus $11.88 million at October 31, 2013. Current assets were $22.61 million and current liabilities $1.82 million, yielding working capital of $20.8 million and a current ratio of approximately 12:1. The company reported no outstanding indebtedness, apart from ordinary operating liabilities and income taxes payable. Capital expenditures were $10,000; dividends paid were $570,000.
Changes, outlook and key risks
- RF Neulink and RadioMobile were sold in 2013 and are presented as discontinued operations. Q1 2014 discontinued-operation income was $1,000, including royalty income from the sale arrangements; the comparable 2013 amount was $25,000.
- Management said cash and current assets, together with anticipated operating cash generation, should fund needs for at least 12 months. The company had no bank credit facility and did not anticipate material capital-equipment needs in the next 12 months. No specific earnings or revenue guidance was provided.
- Management cautioned that demand for Cables Unlimited’s new cabling product depends largely on 4G site retrofits and competing products and cannot be estimated accurately. It expects the effective tax rate to increase from the quarter’s 24% as the benefit from disqualifying incentive-stock-option dispositions may not recur; the prior-year effective rate was 28%.
- Customer concentration is material: one customer represented 35% of Q1 sales (53% in Q1 2013) and 24% of quarter-end receivables. The customer has no minimum-purchase commitment. One product line represented 18% of Q1 sales, also without a minimum-purchase commitment. Two vendors accounted for 19% and 15% of inventory purchases.
- Approximately $12.4 million of cash exceeded federally insured limits. Inventory valuation, receivable collectability, and goodwill and intangible-asset impairment depend on management estimates.
- A former employee’s Sarbanes-Oxley whistleblower complaint is ongoing. The company disputes the allegations; the matter is being defended by counsel appointed under its employment-practices insurance policy. The complaint seeks various forms of relief but specifies no damages amount.
- The board declared a $0.07-per-share quarterly dividend on March 7, 2014, payable April 15 to holders of record March 30. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the sales decline at Cables Unlimited persists and how much demand depends on 4G retrofit activity, competing products, and its concentrated product/customer exposure.
- Continuing customer orders and receivable collectability, given the major customer’s lack of minimum-purchase obligations.
- Gross-margin trends, operating cash generation, and the expected tax-rate increase as option-related tax benefits change.
- Progress and potential financial exposure from the former employee’s complaint, as well as the terms and receipts under the discontinued-business royalty agreements.
- Cash concentration above insured limits and the company’s liquidity plans in the absence of a committed credit facility.