RF Industries(RFIL) - 2019 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis of financial condition and results of operations, and disclosures regarding market risk and internal controls Item 1: Financial Statements For the quarter ended January 31, 2019, RF Industries, Ltd. reported total assets of $32.5 million, a slight increase from October 31, 2018. Net sales grew 34% year-over-year to $10.6 million, driving consolidated net income to $640,000, up from $454,000 in the prior-year period. Cash and cash equivalents decreased to $14.0 million from $16.3 million, primarily due to increased working capital needs to support sales growth Condensed Consolidated Balance Sheets The balance sheet shows a slight increase in total assets to $32.5 million, with notable shifts in cash, receivables, and inventories, and an increase in stockholders' equity | | January 31, 2019 (Unaudited, in thousands) | October 31, 2018 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $28,599 | $28,530 | | Total Assets | $32,507 | $32,502 | | Total Current Liabilities | $3,803 | $4,719 | | Total Liabilities | $3,814 | $4,719 | | Total Stockholders' Equity | $28,693 | $27,783 | - Key changes from October 31, 2018 to January 31, 2019 include a decrease in cash and cash equivalents from $16.3 million to $14.0 million, an increase in trade accounts receivable from $4.3 million to $5.6 million, and an increase in inventories from $7.1 million to $8.2 million[6] Condensed Consolidated Statements of Operations Net sales increased 34% year-over-year to $10.6 million, driving significant growth in operating income and consolidated net income for the quarter | | Three Months Ended January 31, 2019 (in thousands) | Three Months Ended January 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net sales | $10,647 | $7,966 | | Gross profit | $3,145 | $2,463 | | Operating income | $786 | $358 | | Consolidated net income | $640 | $454 | | Diluted EPS (Net income) | $0.07 | $0.05 | - Net sales increased by 34% year-over-year, leading to a 120% increase in operating income and a 41% increase in consolidated net income for the first quarter of fiscal 2019 compared to the same period in 2018[12] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $28.7 million, primarily due to net income and stock option exercises, partially offset by dividends - Total stockholders' equity increased from $27.8 million at the beginning of the period to $28.7 million at January 31, 2019. The increase was primarily driven by net income of $640,000 and proceeds from the exercise of stock options of $342,000, partially offset by dividends paid of $186,000[13] Condensed Consolidated Statements of Cash Flows The company experienced a net cash outflow of $2.4 million from operating activities, mainly due to increased working capital to support sales growth | | Three Months Ended January 31, 2019 (in thousands) | Three Months Ended January 31, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,401) | ($220) | | Net cash used in investing activities | ($73) | $12 | | Net cash provided by financing activities | $156 | ($19) | | Net decrease in cash | ($2,318) | ($159) | | Cash at end of period | $14,016 | $5,880 | - The company experienced a net cash outflow from operating activities of $2.4 million, primarily due to increases in trade accounts receivable ($1.4 million) and inventories ($1.1 million) to support higher sales volumes[16] Notes to Unaudited Condensed Consolidated Financial Statements Key notes include the adoption of ASC 606, the sale of a subsidiary, significant customer concentration, and a post-quarter acquisition announcement - On November 1, 2018, the Company adopted the new revenue recognition standard ASC 606, which did not have a material impact on its revenue recognition policies or financial statements[20][23] - On October 31, 2018, the Company sold its subsidiary, Comnet Telecom Supply. The results of Comnet are reported as discontinued operations. For the three months ended January 31, 2018, Comnet generated $2.4 million in net sales and $150,000 in net income[24] - For Q1 2019, two customers accounted for 38% and 14% of net sales, respectively. In the prior year's quarter, one customer accounted for 47% of net sales, indicating significant customer concentration[38] - Subsequent to the quarter end, the company announced a binding agreement to purchase the assets of C Enterprises, L.P., a manufacturer of custom cables, and declared a quarterly cash dividend of $0.02 per share[54][55] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 34% year-over-year sales growth in Q1 2019 to increased demand in both the Custom Cabling and RF Connector segments, particularly from project work in OEM and wireless carrier markets. Gross margin slightly decreased from 31% to 30% due to higher outsourcing costs. Despite higher selling and general expenses in absolute terms, they declined as a percentage of sales from 22% to 19%, reflecting improved operational efficiency. The company maintains a strong liquidity position with $14.0 million in cash and no debt, and a stable backlog of $11 million Critical Accounting Policies The company's critical accounting policies involve significant estimates and judgments, including inventory valuation, impairment, income taxes, and the adoption of ASC 606 - The company's critical accounting policies involve significant estimates and judgments, particularly regarding inventory valuation, allowance for doubtful accounts, impairment of long-lived assets including goodwill, income taxes, and stock-based compensation[60][61][62][63] - The company adopted the new revenue recognition standard ASC 606 on November 1, 2018, using the modified retrospective method. The adoption did not have a material impact on revenue recognition[60] Overview The company operates through two segments, Custom Cabling and RF Connector, with Custom Cabling contributing the majority of sales in Q1 2019 - The company operates through two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly[71] - For Q1 2019, the Custom Cabling segment accounted for 69% of total sales, while the RF Connector segment accounted for the remaining 31%[72] Liquidity and Capital Resources The company maintains a strong liquidity position with $14.0 million in cash and no debt, despite a cash decrease due to increased working capital for sales growth | Metric | As of January 31, 2019 | | :--- | :--- | | Cash and cash equivalents | $14.0 million | | Working capital | $24.8 million | | Current ratio | 7.5:1 | | Outstanding indebtedness | $0 | - The company maintained a consistent backlog of $11 million as of January 31, 2019, unchanged from the end of fiscal year 2018[76] - Cash decreased by $2.3 million during the quarter, primarily due to a $1.4 million increase in accounts receivable and a $1.1 million increase in inventories, driven by higher sales[77] Results of Operations Net sales increased significantly across both segments, while gross margin slightly declined due to higher outsourcing costs, and operating efficiency improved | Metric | Q1 2019 | Q1 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $10.6M | $8.0M | +34% | | Custom Cabling Sales | $7.4M | $5.3M | +38% | | RF Connector Sales | $3.3M | $2.6M | +24% | | Gross Profit | $3.1M | $2.5M | +28% | | Gross Margin | 30% | 31% | -1 ppt | - The decrease in gross margin from 31% to 30% was primarily due to higher costs of outsourcing at the Custom Cabling segment[83] - Selling and general expenses as a percentage of sales declined to 19% from 22% in the prior-year quarter, indicating improved operational efficiency[86] - The effective tax rate increased to 21% in Q1 2019 from 16% in Q1 2018, mainly due to the elimination of certain tax benefits following the 2017 Tax Act[88] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company reported no new or material quantitative and qualitative disclosures about market risk for the period - The company had nothing to report regarding quantitative and qualitative disclosures about market risk[92] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of January 31, 2019. There were no material changes to the company's internal control over financial reporting during the quarter - Based on an evaluation as of the end of the period, the company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective[95] - There were no changes in the company's internal control over financial reporting during the quarter ended January 31, 2019, that materially affected, or are reasonably likely to materially affect, these controls[96] Part II. OTHER INFORMATION This section covers legal proceedings, risk factors, and other miscellaneous items, including exhibits filed with the report Item 1. Legal Proceedings The company is not subject to any material legal proceedings outside the ordinary course of business as of the report date - As of the date of this report, the company is not subject to any proceeding that is not in the ordinary course of business or that is material to its financial condition[98] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended October 31, 2018 - There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended October 31, 2018[99] Other Items (Items 2, 3, 4, 5, 6) The company had nothing to report for Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), Item 3 (Defaults upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information). Item 6 lists the exhibits filed with the report - The company reported nothing for Unregistered Sales of Equity Securities, Defaults upon Senior Securities, Mine Safety Disclosures, and Other Information[100][101][102][103] - Item 6 lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files[104]