RF Industries, Ltd. — Form 10-Q Summary
Period: The filing covers the quarter and nine months ended July 31, 2014, and was filed September 11, 2014. This differs from the request metadata of “2013 Q3.” The interim financial statements are unaudited and include RF Industries and its wholly owned subsidiary, Cables Unlimited.
Financial performance
| Metric | Three months ended July 31, 2014 | Prior-year quarter | Nine months ended July 31, 2014 | Prior-year period |
|---|---|---|---|---|
| Net sales | $5.536 million | $9.478 million | $17.150 million | $28.220 million |
| Gross profit | $2.488 million | $3.948 million | $7.822 million | $12.465 million |
| Gross margin | 45% | 42% | 45% | 44% |
| Operating income | $628,000 | $1.761 million | $1.730 million | $5.583 million |
| Income from continuing operations | $358,000 | $1.277 million | $1.082 million | $4.022 million |
| Net income | $372,000 | $917,000 | $1.114 million | $3.577 million |
| Diluted earnings per share | $0.04 | $0.11 | $0.13 | $0.43 |
For the nine months, operating cash flow was $3.387 million, versus $4.518 million a year earlier. Investing activities used $109,000, and financing activities used $922,000, including $1.723 million of dividends. Cash increased $2.356 million to $14.237 million.
At July 31, 2014, current assets were $23.370 million and current liabilities $2.184 million, yielding working capital of $21.2 million and a current ratio of approximately 11:1. Total liabilities were $3.134 million. The company had no borrowings outstanding; its $5 million line of credit was fully available. No material additional capital-equipment needs were anticipated over the next 12 months.
Material changes and drivers
- Quarterly sales fell 42%; nine-month sales fell 39%. The main driver was Cables Unlimited, where sales declined 73% in the quarter and 65% over nine months, reflecting weaker demand for a project-based cabling product associated with cellular-site upgrades.
- RF Connector and Cable Assembly sales rose 7% in the quarter but declined 8% over nine months; management attributed the year-to-date decline to softer industry demand. Medical Cabling and Interconnector sales fell 13% in the quarter and 7% year to date, partly due to lower orders from a significant customer.
- Gross margin improved as the sales mix shifted toward RF Connector and Cable Assembly, which generally has higher margins. For the nine-month period, the benefit was partly offset by Cables Unlimited’s lower revenue base, competition, and pricing pressure.
- Selling and general expense decreased 18% in the quarter and 14% year to date, mainly reflecting lower headcount and, in the prior-year periods, higher legal, consulting, and other compensation costs. Engineering expense increased 14% in the quarter and 16% year to date.
- Discontinued operations contributed $14,000 of after-tax income in the quarter and $32,000 year to date, compared with losses of $360,000 and $445,000 in the prior-year periods. The former RF Neulink and RadioMobile businesses were sold in 2013; the company continues to receive royalties under the sale agreements.
Outlook, risks, and other notable items
- Management expected lower medical-segment revenue in subsequent quarters because of slowed orders from a significant customer. Future demand for Cables Unlimited’s project-related product was described as difficult to estimate and dependent partly on cellular-site upgrades and competing products. The filing provides no quantified earnings or revenue guidance.
- One customer represented 33% of nine-month sales and 34% of quarterly sales; its receivables were 29% of accounts receivable at July 31. The customer has no minimum purchase obligation and may stop ordering, creating a material concentration risk.
- A product line accounted for 7% of quarterly sales and 11% of nine-month sales; its customer also has no minimum purchase obligation. Three vendors each represented 13%–14% of nine-month inventory purchases.
- Cash balances exceeded federal deposit-insurance limits by approximately $13.5 million. The $5 million credit facility is secured by certain company assets, includes covenants, and matures June 30, 2016; no amount was drawn at period-end.
- The company paid quarterly dividends of $0.07 per share during the first three quarters of fiscal 2014. The board declared another $0.07 dividend payable October 15, 2014. A repurchase authorization covers up to 500,000 shares, but no shares had been repurchased by July 31.
- The San Diego facility lease was extended through March 2017; remaining minimum rent payments totaled $627,000. Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material changes to previously disclosed risk factors or legal proceedings were reported.
Investor verification checklist
- Confirm the intended reporting period: the supplied filing is for July 31, 2014, not 2013.
- Track Cables Unlimited orders and the pace of cellular-site upgrades, and assess whether the improved gross margin can persist as product mix changes.
- Monitor the major customer’s orders and receivables, as well as medical-segment demand and customer concentration.
- Reconcile operating cash generation, dividends, and cash balances; review the credit-line covenants and the exposure of uninsured cash deposits.
- Review the filing’s segment disclosures and prior annual-report risk factors for further detail; this summary does not include full segment expense and balance-sheet information.