RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended July 31, 2012. The request metadata says “2011 Q3,” but the filing itself covers 2012 Q3.
Business context
RF Industries makes connectors, cables and related products, primarily for wireless markets, and also operates in medical cabling, RF wireless and fiber-optic products through Cables Unlimited. The 2011 comparison includes only about six weeks of Cables Unlimited operations, acquired June 15, 2011; therefore, reported year-over-year growth is not fully like-for-like.
Key financial metrics
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | $7.47 million, up 51% from $4.95 million | $19.70 million, up 46% from $13.48 million |
| Gross profit / margin | $3.35 million / 45%, versus $2.42 million / 49% | $8.88 million / 45%, versus $6.82 million / 51% |
| Operating income | $1.09 million, versus $125 | $2.20 million, up 91% from $1.15 million |
| Net income attributable to RF Industries | $735,286, versus $63,451 | $1.45 million, versus $821,456 |
| EPS attributable to RF Industries | $0.11 basic; $0.10 diluted | $0.21 basic; $0.19 diluted |
| Cash from operating activities | Not presented separately for the quarter | $2.25 million, versus cash used of $380,267 |
Liquidity and debt: At July 31, 2012, cash and cash equivalents were $5.63 million, current assets $16.73 million, current liabilities $3.01 million, working capital $13.72 million and the current ratio approximately 6:1. The company reported no outstanding indebtedness other than accounts payable and accrued expenses and had no commercial credit facility. Total liabilities were $4.11 million. Cash rose substantially in part because $4.09 million of certificates of deposit matured and had not been reinvested.
Cash uses and other balance-sheet changes: Nine-month investing cash flow was positive $3.59 million, mainly from certificate-of-deposit maturities, partly offset by $503,000 in capital expenditures. Financing activities used $1.97 million, including $1.04 million in dividends and $1.14 million in share repurchases. Inventory was $6.76 million, up 9% from October 31, 2011; receivables were $3.14 million, up about 20%.
Material changes and management commentary
- Quarterly sales growth reflected higher sales across all segments, the longer comparison period for Cables Unlimited, and sales of its new OptiFlex hybrid fiber-optic and DC-power cabling product. Cables Unlimited contributed $2.73 million of quarterly sales and $6.01 million for the nine-month period.
- Lower consolidated gross margins reflected the larger share of sales from Cables Unlimited, which had gross margins around 34% in the quarter and 35% for the nine months, as well as higher raw-material costs in RF Connector and Cable Assembly. Medical Cabling margins also fell in the quarter; RF Wireless margins declined amid shipment delays on the Los Angeles County contract.
- Management expects OptiFlex sales to increase Cables Unlimited’s share of revenue in the coming year. Most of the $2.6 million Los Angeles County Fire Department contract was expected to be delivered and installed in the two fiscal quarters following July 31, 2012.
- Management believed available current assets and operating cash generation would meet anticipated needs for at least 12 months. It did not anticipate material capital-equipment needs, but had no existing bank credit facility.
Risks, contingencies and unusual items
- One customer represented approximately 36% of quarterly sales and 25% of nine-month sales. The customer has no minimum-purchase commitment and could reduce or stop orders.
- Two vendors represented 17% and 13% of nine-month inventory purchases, creating supplier-concentration exposure.
- Gross margin compression, inventory valuation and obsolescence, receivable collectability, and goodwill and intangible-asset impairment involve estimation risk. The filing reports $3.08 million of goodwill, which is not expected to be tax-deductible.
- The company deconsolidated K&K Unlimited, LLC on January 25, 2012 after Cables Unlimited was no longer deemed its primary beneficiary. This reduced reported assets by about $1.6 million and liabilities by about $1.4 million; management said the effect on 2012 operating results was not material.
- The company wrote off $1.11 million of fully depreciated equipment and fixtures deemed no longer useful; the write-off did not affect net fixed assets. The 2011 quarter included significant acquisition-related and other professional fees and one-time tax benefits, which affect comparisons.
- The nine-month effective tax rate was 34.8%; management expected an approximately 42% rate for the fiscal year absent discrete items. The filing reports no legal proceedings to disclose and refers investors to the 2011 Form 10-K risk factors.
Most important facts for investors to verify
- How much of sales growth reflects ongoing demand versus the acquisition comparison and timing of contract deliveries; monitor OptiFlex and the Los Angeles County contract.
- Whether consolidated gross margins stabilize as Cables Unlimited grows, and whether cost increases or shipment delays persist.
- Customer and supplier concentration, including changes in major-customer orders and inventory commitments.
- Cash conversion and working-capital needs, especially receivables and inventory growth, alongside dividends and share repurchases.
- The actual effective tax rate, and whether management’s liquidity outlook remains sound without a committed credit facility.