RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2021 (fiscal 2021 first quarter). The request metadata says “2020 Q1,” but the filing covers 2021 Q1; the comparable period is the three months ended January 31, 2020. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise indicated.
Business context and results
RF Industries manufactures and markets interconnect products and systems, including cables, connectors, wiring harnesses, cooling systems and small-cell solutions. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. The company said COVID-19 disrupted operations, reduced workforce availability and customer demand, and delayed projects.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $10.002 million | $12.414 million |
| Gross profit / margin | $2.606 million / 26.1% | $3.253 million / 26.2% |
| Operating income (loss) | $(0.589) million | $0.001 million |
| Net income (loss) | $(0.403) million | $0.026 million |
| Diluted loss (earnings) per share | $(0.04) | $0.00 |
| Cash from (used in) operations | $(0.577) million | $5.606 million |
Sales declined 19% year over year. Custom Cabling sales fell 30% to $6.427 million, chiefly from weaker project-based wireless carrier and tower-site business and delayed small-cell deployments. RF Connector sales rose 12% to $3.575 million. Custom Cabling recorded a $1.042 million pretax loss, while RF Connector had $0.453 million of pretax income. Consolidated gross margin was essentially unchanged; selling and general expense increased to $2.764 million, or 28% of sales, from $2.656 million, or 21%.
Financial position and liquidity
- At January 31, 2021, cash and cash equivalents were $15.489 million, total assets $40.635 million, and working capital $24.5 million. Current assets were $31.802 million and current liabilities $7.315 million; the reported current ratio was approximately 4.4:1.
- Cash declined $0.308 million during the quarter. Investing used $0.116 million, primarily capital expenditures; financing provided $0.385 million from stock-option exercises. Operating cash use reflected the net loss, inventory growth and a $1.326 million increase in other current assets, partly offset by collections of receivables and noncash items.
- PPP loans totaled approximately $2.8 million; $2.788 million was reported as current and long-term borrowings at quarter-end. The SBA forgave the full balance, including applicable interest, in February 2021. The company had closed its $5 million revolving credit line on December 30, 2020, with no borrowings outstanding, and had no credit facility available at filing.
- Operating lease liabilities totaled $1.266 million, including $0.789 million current. The Schrofftech acquisition earn-out liability was $0.296 million at quarter-end, with potential payments of up to $2.4 million through October 31, 2021.
Outlook, risks and unusual items
- Management expected COVID-related economic slowdown effects to persist through at least the second quarter of 2021. It cited facility and workforce disruptions, customer order delays or cancellations, small-cell zoning and site-access challenges, and increased costs.
- Management believed cash, current assets, expected operating cash generation and backlog would fund anticipated needs for at least 12 months from filing. Backlog was $7.1 million at January 31, 2021, versus $6.3 million at October 31, 2020; orders may be cancelled and future orders are difficult to predict. The company did not anticipate material capital-equipment needs over the next 12 months.
- Two distributors represented approximately 16% and 12% of quarterly sales and 15% and 19% of quarter-end receivables, respectively. Their agreements impose no minimum purchase obligations. Cash balances exceeded federally insured limits by approximately $14.3 million.
- The Consolidated Appropriations Act allowed PPP expenses to be deducted for tax purposes, affecting deferred tax assets and taxes payable. The quarter included a $0.194 million income tax benefit and $0.766 million deferred-tax adjustment in operating cash flows.
- No goodwill impairment indicators were identified at quarter-end, but management warned that future impairment could be material. Management reported no material, non-ordinary-course legal proceeding and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the reporting-period label: this is the quarter ended January 31, 2021, despite the request’s “2020 Q1” metadata.
- Reconcile diluted weighted-average shares: the financial statements report 9,864,689 for Q1 FY2021, while MD&A states 9,784,760.
- Review the effect of PPP forgiveness, confirmed after quarter-end, and the company’s liquidity after the revolving credit facility closed.
- Track Custom Cabling recovery, customer concentration, COVID-related order and project delays, and whether backlog converts to sales.
- Assess inventory valuation, goodwill impairment exposure and the assumptions behind the Schrofftech earn-out liability.