RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2017 (fiscal 2017 first quarter), compared with the three months ended January 31, 2016. The filing is dated March 15, 2017. Amounts below are in U.S. dollars.
Business context and results
RF Industries designs, manufactures and markets interconnect products and systems. Its reportable segments are RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly. The filing describes softer demand for wireless and cell-tower cabling following completion of much of the 4G upgrade cycle, alongside customer offshoring affecting Rel-Tech.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $6.617 million | $6.784 million |
| Gross profit; gross margin | $1.857 million; approximately 28% | $2.023 million; approximately 30% |
| Operating loss | $359,000 | $571,000 |
| Loss from continuing operations | $238,000 | $315,000 |
| Net loss | $194,000 | $353,000 |
| Basic and diluted loss per share | $0.02 | $0.04 |
| Cash used in operating activities | $699,000 | $1.513 million |
Financial position, liquidity and cash flow
- At January 31, 2017, cash and cash equivalents were $4.354 million, current assets $16.143 million, current liabilities $3.382 million, and working capital approximately $12.8 million. The reported current ratio was approximately 4.8:1.
- Total liabilities were $3.903 million; the filing reports no outstanding borrowings. A $5 million bank line of credit was terminated in September 2016.
- Cash declined $904,000 during the quarter, from $5.258 million. Investing activities used $6,000, primarily reflecting $6,000 of capital expenditures. Financing activities used $199,000, including $176,000 of dividends.
- Operating cash use reflected the net loss, increased inventory and other current assets, and accrued expense payments. Inventory rose to $6.554 million from $6.022 million.
- Approximately $3.8 million of cash exceeded federally insured limits. Two customers represented approximately 15% and 10% of quarterly sales; the filing says neither has minimum purchase obligations.
Changes versus prior-year quarter and management outlook
- Sales fell 2% overall. RF Connector and Cable Assembly sales rose 30% to $2.535 million, aided by DAS sales; prior-year segment sales included $86,000 from Aviel, sold in December 2015. Custom Cabling sales fell 18% to $4.082 million, primarily due to weaker telecom and wireless demand and Rel-Tech customer offshoring.
- Gross margin declined about two percentage points, attributed to product mix and fixed manufacturing costs spread over lower Custom Cabling revenue. Selling and general expense fell 18% to $1.992 million, mainly from cost reductions; engineering expense increased to $224,000 from $161,000.
- Management said it was emphasizing sales in the public-safety DAS market and pursuing efficiencies and cost reductions. It believed existing assets and expected operating cash generation would fund anticipated needs for at least 12 months. The company did not provide quantitative earnings or revenue guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- The company paid a $0.02-per-share quarterly dividend during the period. A further $0.02-per-share dividend was declared March 9, 2017, payable April 15, 2017. The San Diego facility lease was extended through July 31, 2022, with monthly rent increasing from $20,125 to $22,721.
- Discontinued operations generated $44,000 of after-tax income versus a $38,000 loss in the prior-year quarter. Current-quarter amounts included RadioMobile royalties and Bioconnect equipment-sale income; the RadioMobile royalty period has expired. The company had shut down Bioconnect in 2016 as part of its plan to exit underperforming, non-core divisions.
Risks, contingencies and controls
- Management identified a material weakness involving timely review of accounting for certain complex estimates. Disclosure controls and procedures were deemed ineffective as of January 31, 2017. Additional review procedures and a formal quarterly close checklist were implemented; management expected remediation before fiscal year-end 2017, subject to operating and testing the controls effectively.
- Customer concentration and the absence of minimum purchase commitments expose sales and profits to order reductions or customer loss. Inventory valuation, impairment estimates and the Rel-Tech earn-out valuation also involve significant judgment.
- The Rel-Tech acquisition agreement provides for earn-out payments of up to $800,000 through May 31, 2018. The current accrued earn-out liability was $374,000, with a further $88,000 recorded as a long-term liability.
- The filing reports no material changes to the risk factors in the prior Form 10-K, no legal proceedings to report, and no material market-risk disclosure for this quarter. It reports no unrecognized tax benefits at quarter-end.
Important facts for investors to verify
- Confirm the trend in telecom and cell-tower demand, DAS sales, and Rel-Tech customer retention in subsequent filings.
- Track operating cash flow, inventory levels and reserves, and whether management’s 12-month liquidity expectation remains supportable.
- Monitor customer concentration and any changes in major-customer orders or receivables.
- Check whether the disclosed material weakness is remediated and whether controls are demonstrated to operate effectively.
- Review the earn-out liability, lease commitments, and ongoing dividend payments against cash generation.