RF Industries, Ltd. — Form 10-Q Summary
Reporting period: Three and nine months ended July 31, 2016; balance-sheet comparisons are with October 31, 2015. The request metadata says “2015 Q3,” but the filing covers fiscal 2016 Q3.
Business context and financial performance
RF Industries designs, manufactures, and markets interconnect products, including cables, connectors, fiber-optic products, and data-center solutions. Its two reportable segments were RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly. The filing’s financial statement amounts below are in millions unless noted.
| Metric | Three months ended July 31, 2016 | Nine months ended July 31, 2016 |
|---|---|---|
| Net sales | $7.64 million; down 8% year over year | $22.16 million; approximately flat year over year |
| Gross profit / margin | $2.13 million / 28%; prior-year margin 31% | $6.50 million / 29%; prior-year margin 34% |
| Operating income (loss) | $(0.67) million | $(1.32) million |
| Net income (loss) | $(0.60) million; $(0.07) per diluted share | $(1.06) million; $(0.12) per diluted share |
| Operating cash flow | Not presented for the quarter | $(2.08) million |
For the nine-month period, gross profit fell from $7.63 million to $6.50 million as cost of sales rose despite nearly unchanged revenue. Selling and general expenses increased 9% to $7.26 million; engineering expenses declined 3% to $0.56 million.
Liquidity, debt, and cash flow
At July 31, 2016, cash was $4.65 million, current assets $17.41 million, current liabilities $3.71 million, and working capital $13.7 million (current ratio approximately 4.7:1). Total liabilities were $5.02 million and stockholders’ equity was $24.55 million. The company reported no outstanding indebtedness. Its $5 million line of credit had no borrowings and was terminated effective September 8, 2016.
Nine-month investing activities provided $0.04 million, while financing activities used $0.91 million, including $0.96 million of dividends and $0.16 million used to purchase treasury stock. Cash declined $2.95 million from $7.60 million at October 31, 2015. Management said existing assets and expected operating cash generation should fund needs for at least 12 months.
Material changes and management commentary
- Rel-Tech contributed $1.7 million of Q3 sales and $5.0 million for nine months. Excluding Rel-Tech, management said sales from other divisions fell $1.1 million in Q3 and $3.8 million, or 18%, over nine months.
- Management attributed lower sales to softer demand for telecommunications and data products at Comnet, declining fiber-optic orders at Cables Unlimited, and industry-wide weakness in RF cable and connector products. Higher-margin connector and Optiflex sales declined; lower volume and inventory reserves also pressured margins. Management expects aggregate margins to remain below historical rates.
- During Q3, the RF Connector and Cable Assembly segment generated $2.58 million of sales and a $0.54 million pretax loss; Custom Cabling generated $5.06 million of sales and a $0.13 million pretax loss. For nine months, segment sales were $6.61 million and $15.55 million, respectively, with pretax losses of $1.24 million and $0.11 million.
- The company sold its Aviel division in December 2015 and announced the shutdown of Bioconnect in March 2016, as part of a plan to exit underperforming, non-core operations. Nine-month discontinued operations recorded a $0.07 million loss, including a $0.16 million pretax Bioconnect inventory write-down.
Outlook, risks, and unusual items
Management plans to focus marketing on the Distributed Antenna Systems (DAS) market to grow core-product sales and margins, and said it was taking steps to reduce expenses. The filing provides no quantified earnings or revenue guidance. A strategic transaction intended to expand the company’s DAS presence did not proceed and resulted in approximately $256,000 of Q3 professional fees and other costs.
Key risks include continued weakness in end-market demand, lower margins as the sales mix shifts toward custom cabling, inventory valuation judgments, and customer concentration. One customer represented 15% of nine-month sales and 20% of July 31 accounts receivable; it has no minimum-purchase commitment and could stop buying at any time. Approximately $3.8 million of cash was held above federally insured limits. Rel-Tech and Comnet earn-out liabilities totaled approximately $1.03 million at July 31, including $0.60 million current and $0.16 million long-term (the filing’s accrued-expense note reports total earn-out liabilities of $0.87 million, so the presentation should be checked). The board declared a $0.02-per-share dividend for payment October 15, 2016.
Important facts for investors to verify
- Confirm the period: the filing is for the quarter ended July 31, 2016, notwithstanding the request metadata’s 2015 label.
- Reconcile earn-out liabilities across the acquisition notes and accrued-expense disclosures.
- Track whether sales declines at legacy divisions stabilize and whether management’s DAS strategy improves revenue and margins.
- Assess the sustainability of cash generation and dividends given nine-month operating cash outflow and declining cash balances.
- Monitor the major customer’s orders and receivables exposure, inventory reserves, and the transition costs or results from closing Bioconnect.