RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2017. The request metadata says 2016 Q2, but the filing itself covers 2017 Q2. Financial statements are unaudited; amounts below are in thousands unless stated otherwise.
Business context and financial performance
RF Industries designs, manufactures and markets interconnect products and systems, including cables, connectors and cabling solutions. Its two reportable segments are RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly.
| Metric | Three months ended Apr. 30, 2017 | Three months ended Apr. 30, 2016 | Six months ended Apr. 30, 2017 | Six months ended Apr. 30, 2016 |
|---|---|---|---|---|
| Net sales | $7,640 | $7,735 | $14,257 | $14,519 |
| Gross profit | $1,954 | $2,352 | $3,812 | $4,375 |
| Gross margin | 26% | 30% | 27% | 30% |
| Operating income (loss) | $66 | $(78) | $(293) | $(649) |
| Net income (loss) | $78 | $(113) | $(115) | $(467) |
| Net income (loss) per diluted share | $0.01 | $(0.01) | $(0.01) | $(0.05) |
| Cash used in operating activities | Not presented by quarter | $(538) | $(1,957) |
Liquidity, balance sheet and cash flow
- At April 30, 2017, cash was $4,317, down from $5,258 at October 31, 2016. Current assets were $16,937 and current liabilities $4,086; working capital was approximately $12.9 million and the current ratio approximately 4.1:1.
- Total liabilities were $4,539 and stockholders’ equity was $20,999. The filing reports no outstanding borrowings; its former $5 million credit line was terminated in September 2016.
- Six-month cash use: $538 from operations, $26 in investing activities and $377 in financing activities, including $353 of dividends. Cash declined by $941.
- Inventory increased to $6,690 from $6,022; inventory reserves increased to $676 from $500. Accounts receivable was $4,471, versus $4,077.
Material changes and management commentary
- Quarterly sales decreased 1% year over year; six-month sales decreased 2%. RF Connector and Cable Assembly sales rose 25% for the quarter and 27% for the six months, largely on stronger demand in the distributed antenna systems (DAS) market. Custom Cabling sales fell 11% and 13%, respectively.
- Management attributed weaker Custom Cabling demand to the slowdown in wireless and cell-tower upgrades, while some Rel-Tech customers shifted work to offshore manufacturers. Gross margin declined due to product mix and fixed manufacturing costs spread over lower Custom Cabling revenue.
- Selling and general expense fell 25% for the quarter and 22% for the six months, primarily from cost reductions. Engineering expense increased. The interim CEO served without salary.
- Discontinued operations contributed $44 of after-tax income in the quarter and $88 for the six months, mainly RadioMobile royalty income. The royalty-earning period has expired. The filing also reports income from sale of Bioconnect equipment.
- Management said existing assets and anticipated operating cash generation should fund liquidity needs for at least 12 months. It did not anticipate material capital equipment needs in the next 12 months. No specific earnings or revenue guidance was provided.
- The company paid dividends of $0.04 per share during the six months and declared a further $0.02 quarterly dividend, payable July 14, 2017. The San Diego lease was extended through July 2022; a subsequent amendment expanded the space and raised monthly rent. Cables Unlimited’s lease was extended through June 2018.
Risks, contingencies and unusual items
- Two customers represented approximately 15% and 14% of six-month sales; their receivables were approximately 16% and 24% of net receivables. Customer agreements have no minimum purchase obligations, and loss or reduced orders could materially affect results.
- Cash balances exceeded federal deposit insurance limits by approximately $3.1 million. One vendor represented 14% of second-quarter inventory purchases.
- Management disclosed a material weakness in controls over timely review of complex accounting estimates. Disclosure controls were not effective at April 30, 2017. Remediation procedures were introduced, but management said the weakness would not be considered remediated until controls had operated effectively for a sufficient period; it expected completion before fiscal year-end 2017.
- The company reported no material legal proceedings outside the ordinary course and no material changes to the risk factors in its prior Form 10-K. It had no unrecognized tax benefits or accrued tax interest and penalties at April 30, 2017.
Most important facts for investors to verify
- Whether DAS growth can offset continued weakness in cell-tower, telecom and other Custom Cabling demand, and whether margins stabilize.
- Whether operating cash flow improves, given six-month operating cash use and higher inventory.
- Progress in remediating the material weakness in internal controls, including management’s subsequent testing and conclusions.
- Customer concentration, order visibility and the potential effect of losing or reducing business from major customers.
- Whether the company’s liquidity outlook remains adequate after dividends, lease commitments and any future acquisitions.