RF Industries, Ltd. — FY2011 Form 10-K
Reporting period: Fiscal year ended October 31, 2011; comparative period is FY2010. Although the request metadata refers to 2010 Q4, this filing reports a full fiscal year through October 31, 2011. Per-share data reflects the two-for-one stock split effective March 10, 2011.
Business context
RF Industries designs, manufactures and markets interconnect products and wireless systems. Its four reporting segments are RF Connector and Cable Assembly, Medical Cabling and Interconnector, RF Wireless, and Cables Unlimited. The connector and cable business remains the core business; Cables Unlimited was acquired on June 15, 2011.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $19.434 million | $16.322 million |
| Gross profit / margin | $9.336 million / 48% | $8.163 million / 50% |
| Operating income / margin | $1.136 million / 6% | $2.004 million / 12% |
| Income before taxes | $1.152 million | $2.091 million |
| Net income | $773,011 | $1.220 million |
| Basic / diluted EPS | $0.12 / $0.11 | $0.21 / $0.19 |
| Cash provided by operating activities | $122,844 | $2.503 million |
Sales rose 19%, primarily from Cables Unlimited, which contributed $2.644 million after acquisition, and growth in medical and wireless sales. The RF Connector and Cable Assembly segment generated $13.868 million, or about 71% of sales; its sales declined $226,000. Medical segment sales increased 25% to $2.154 million, and RF Wireless sales increased to $769,000. Cables Unlimited generated $2.644 million.
Gross margin fell two percentage points, which management attributed mainly to Cables Unlimited’s lower margins. Operating expenses rose $2.041 million; management cited acquisition-related and other professional fees of $673,000, including costs related to an activist shareholder matter. Selling and general expense increased 35% to $6.954 million, while engineering expense rose to $1.247 million. FY2011 included no goodwill impairment; FY2010 included a $137,328 impairment charge for Aviel.
Liquidity, cash flow and capital
At October 31, 2011, cash and cash equivalents were $1.761 million, certificates of deposit were $4.095 million, current assets were $16.413 million, and current liabilities were $3.495 million. Working capital was $12.918 million, down from $15.654 million a year earlier. The company reported total assets of $24.378 million and stockholders’ equity of $19.678 million.
Operating cash flow fell sharply, chiefly because inventory purchases used $1.229 million; inventory increased 34% year over year. Investing activities used $1.739 million, including $2.8 million cash consideration for Cables Unlimited and $368,205 of capital expenditures. Financing activities used $1.352 million, including $2.529 million of dividends and $102,705 of share repurchases, partly offset by option exercises and related tax benefits.
Year-end consolidated current liabilities included $1.394 million of mortgage debt associated with the Cables Unlimited-related variable interest entity (VIE). The SBA mortgage was repaid in November 2011, and the other mortgage was refinanced in January 2012; the company said its guarantees were released and the VIE would be deconsolidated in subsequent periods. Management stated it expected existing assets and operating cash generation to fund needs for at least 12 months, but the company had no bank credit facility.
Changes, outlook and risks
- Acquisition: Cables Unlimited was purchased for $5.6 million, half cash and half 762,738 RF Industries shares. The acquisition added fiber-optic and power/electronic cabling capabilities. FY2011 pro forma unaudited revenue and net income, assuming the acquisition at the start of the year, were $23.007 million and $775,618, respectively; management cautioned that pro forma data is informational and not indicative of future results.
- Outlook: The filing provides no general revenue or earnings guidance. Management expected RF Wireless sales to increase significantly in FY2012 following RadioMobile’s November 2011 $2.6 million Los Angeles County Fire Department contract, and anticipated recognizing approximately $1.7 million of it in FY2012. Completion was scheduled by December 2012.
- Key risks: The company depends on the RF Connector and Cable Assembly segment, which accounted for about 71% of FY2011 sales. One customer represented 17% of sales; independent distributors accounted for approximately 49%. The company also cited dependence on third-party connector manufacturers, economic and telecommunications-industry conditions, competition, and execution risks in new products and acquisitions.
- Unusual and related-party matters: Cables Unlimited’s former owner, Darren Clark, became a director; an entity he controls leases the subsidiary’s facility to the company for $13,000 monthly plus operating costs. A $66,980 loan to CEO Howard Hill remained outstanding. The company reported no legal proceedings expected to materially affect its financial position or results.
- Controls and audit: The auditor gave an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective, but excluded Cables Unlimited from its internal-control assessment; the auditor did not attest to management’s internal-control assessment.
Most important facts for investors to verify
- Whether the Los Angeles County contract proceeds on schedule and whether the anticipated FY2012 revenue is recognized as planned.
- Whether the acquired Cables Unlimited business sustains profitability and improves margins, given its lower margins and the goodwill and intangible assets recorded in the acquisition.
- Whether operating cash flow recovers as inventory investment normalizes, and how dividends and repurchases affect liquidity.
- The status and accounting treatment of the VIE debt, guarantees, and subsequent deconsolidation.
- Customer and supplier concentration, particularly the 17% customer exposure and reliance on third-party connector manufacturers.