RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2013. Although the request metadata labels this “2012 Q2,” the filing covers fiscal 2013’s second quarter. Financial amounts below are in U.S. dollars; millions are abbreviated as “m.”
Business context
RF Industries designs, manufactures and markets interconnect products and systems, including cables, connectors and wireless products. Its reported segments are RF Connector and Cable Assembly, Cables Unlimited, Medical Cabling and Interconnector, and RF Wireless.
Financial results and liquidity
| Metric | Three months ended Apr. 30, 2013 | Three months ended Apr. 30, 2012 | Six months ended Apr. 30, 2013 | Six months ended Apr. 30, 2012 |
|---|---|---|---|---|
| Net sales | $9.16m | $6.67m | $19.67m | $12.23m |
| Gross profit / margin | $4.06m / 44% | $3.02m / 45% | $9.00m / 46% | $5.52m / 45% |
| Operating income | $1.63m | $0.90m | $3.69m | $1.10m |
| Consolidated net income | $1.18m | $0.60m | $2.66m | $0.72m |
| Diluted EPS | $0.14 | $0.08 | $0.32 | $0.09 |
- At April 30, 2013, cash and cash equivalents were $8.49m, current assets $22.19m, current liabilities $2.97m and working capital $19.2m. Management reported a current ratio of approximately 7:1.
- The company reported no outstanding indebtedness other than ordinary operating liabilities. Total liabilities were $4.05m. Management said existing assets and expected operating cash flows should fund needs for at least 12 months; the company had no current bank credit facility.
- Six-month operating cash flow was $1.75m, investing cash outflow $0.06m and financing cash inflow $1.31m. Cash increased $2.99m to $8.49m. Financing included $2.09m of option-exercise proceeds and $1.24m of dividends paid.
- Cash increased from $5.49m at October 31, 2012. The company had $7.7m of cash above federally insured limits.
Material changes and management commentary
- Quarterly sales grew 37%; six-month sales grew 61%. Much of the increase came from Cables Unlimited’s Optiflex Cable: $3.0m of quarterly sales and $6.6m for the six months. Cables Unlimited sales rose 142% in the quarter and 200% for the six months.
- RF Connector and Cable Assembly sales rose 4% in the quarter and 13% for the six months. Medical Cabling and Interconnector sales rose 8% and 5%, respectively. RF Wireless sales fell 52% in the quarter and 6% for the six months as the Los Angeles County Fire Department contract wound down.
- Quarterly gross margin declined to 44% from 45%, primarily because of sales mix. Six-month gross margin improved to 46% from 45%. Management cited production efficiencies, higher volumes, product mix and pricing changes as contributors to segment margin performance.
- Selling and general expense increased $0.30m in the quarter and $0.87m for the six months, reflecting higher commissions, wages and benefits, management bonuses, and legal and consulting costs related to an employee termination and replacement. Engineering expense was broadly stable.
- The effective tax rate declined to about 28% from 34% for the quarter and to 28% from 36% for the six months, largely due to tax deductions from disqualifying dispositions of incentive stock options. Management said the rate could rise toward the prior-year level for the remainder of fiscal 2013.
- The board subsequently approved a $0.07-per-share dividend, payable July 15, 2013 to holders of record June 30, 2013.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management’s stated outlook is that available current assets and expected operating cash generation will be sufficient for at least 12 months; it does not anticipate material capital-equipment needs in that period.
- Customer concentration is significant: one customer represented 52% of six-month sales and 41% of accounts receivable at April 30. The customer has no minimum purchase obligation. Optiflex sales are also tied to wireless-carrier site retrofits, and the company disclosed competing products and possible price pressure.
- The RF Wireless segment’s contract wind-down may constrain future segment revenue unless larger replacement contracts are secured. Foreign sales are a small share of total sales and may fluctuate with order timing.
- On May 24, 2013, a former employee filed a Department of Labor/OSHA whistleblower complaint alleging retaliatory termination and making allegations concerning accounting and securities-law compliance. The company disputes the retaliation claim and notified its employment-practices insurer. The complaint seeks several forms of relief but states no specified damages amount.
- Management concluded disclosure controls were effective as of April 30, 2013 and reported no material change in internal control over financial reporting during the quarter. The interim statements are unaudited; the company cautioned that results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Optiflex demand, pricing and customer adoption can be sustained amid competing products and the absence of minimum purchase commitments.
- The outlook for the customer representing over half of six-month sales, including order levels, receivables and any change in concentration.
- Replacement opportunities and revenue trends following the Los Angeles County contract wind-down.
- The potential financial, legal and reputational impact of the former employee’s complaint and the status of the company’s insurance coverage.
- Whether the effective tax rate rises as management anticipated, and how future dividends compare with cash generation and operating needs.