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RFIL > SEC Filings for RFIL > Form 10-Q on 12-Sep-2013All Recent SEC Filings

Show all filings for R F INDUSTRIES LTD

Form 10-Q for R F INDUSTRIES LTD


12-Sep-2013

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements. These statements relate to future events or the Company's future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "except," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the Company, nor any other person, assumes responsibility for the accuracy and completeness of the forward-looking statements. The Company is under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in its expectations.

The following discussion should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including without limitation the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Risk Factors," and the audited consolidated financial statements and related notes included in the Company's Annual Report filed on Form 10-K for the year ended October 31, 2012 and other reports and filings made with the Securities and Exchange Commission.

Critical Accounting Policies

The unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America ("U. S. GAAP"). One of the accounting policies that involves significant judgments and estimates concerns our inventory valuation. Inventories are valued at the weighted average cost value. Certain items in the inventory may be considered obsolete or excess and, as such, we establish an allowance to reduce the carrying value of these items to their net realizable value. Based on estimates, assumptions and judgments made from the information available at the time, we determine the amounts of these allowances. Because inventories have, during the past few years, represented up to one-third of our total assets, any reduction in the value of our inventories would require us to take write-offs that would reduce our net worth and future earnings.

Another accounting policy that involves significant judgments and estimates is our accounts receivable allowance valuation. The Company routinely assesses the financial strength of its customers and maintains an allowance for doubtful accounts that management believes will adequately provide for credit losses.

Another critical accounting policy that involves significant judgments and estimates is management's assessment of non-amortizable intangible assets for impairments. We review our non-amortizable intangible asset for impairment annually in the fourth quarter at the reporting unit level. Each quarter, we also analyze whether any indicators of impairment exist.

Another critical accounting policy that involves significant judgments and estimates is management's assessment of goodwill for impairments. We review our goodwill for impairment annually in the fourth quarter at the reporting unit level. Each quarter, we also analyze whether any indicators of impairment exist.

The Company uses the Black-Scholes model to value the stock option grants which involves significant judgments and estimates.

Overview

The Company primarily engages in the design, manufacture, and marketing of interconnect products and systems, including coaxial and specialty cables, fiber optic cables and connectors, and electrical and electronic specialty cables. The Company's wireless operations also design and provide mobile management solutions for wireless networks. Prior to the disposition of the RF Neulink division in the third quarter of the current fiscal year, the Company was also engaged in the manufacture and sale of radio-frequency (RF) wireless modems and related products.

Liquidity and Capital Resources

Management believes that existing current assets and the amount of cash it anticipates it will generate from current operations will be sufficient to fund the anticipated liquidity and capital resource needs of the Company for at least twelve months. The Company does not, however, currently have any commercial banking arrangements providing for loans, credit facilities or similar matters should the Company need to obtain additional capital. Management believes that its existing assets and the cash expected to be generated from operations will be sufficient during the current fiscal year based on the following:

As of July 31, 2013, the Company had cash and cash equivalents equal to $10.8 million.

As of July 31, 2013, the Company had $22.9 million in current assets and $3.0 million in current liabilities.

As of July 31, 2013, the Company had no outstanding indebtedness (other than accounts payable, accrued expenses and income taxes payable).

The Company does not anticipate needing material additional capital equipment in the next twelve months. In the past, the Company has financed some of its equipment and furnishings requirements through capital leases. No additional capital equipment purchases have been currently identified that would require significant additional leasing or capital expenditures during the next twelve months. Management also believes that based on the Company's current financial condition, the absence of outstanding bank debt and recent operating results, the Company would be able to obtain bank loans to finance its expansion, if necessary, although there can be no assurance any bank loan would be obtainable or, if obtained, would be on favorable terms or conditions.

The Company generated cash from operating activities of $4.5 million during the nine months ended July 31, 2013 primarily due to consolidated net income of $3.6 million for the nine months ended July 31, 2013. Consolidated net income for the period was offset by $720,000 for changes in operating assets and liabilities, excess tax benefit from stock-based compensation of $482,000 and other non-cash charges of $704,000.

As of July 31, 2013, the Company had a total of $10.8 million of cash and cash equivalents compared to a total of $5.5 million of cash and cash equivalents as of October 31, 2012. As of July 31, 2013, the Company had working capital of $19.9 million and a current ratio of approximately 8:1.

Results of Operations

Three Months Ended July 31, 2013 vs. Three Months Ended July 31, 2012

Net sales for the three months ended July 31, 2013 (the "fiscal 2013 quarter") increased by 31% or $2.3 million to $9.6 million from $7.3 million for the three months ended July 31, 2012 (the "fiscal 2012 quarter") primarily due to a significant increase in net sales at the Company's Cables Unlimited subsidiary. The increase in net sales at Cables Unlimited was partially offset by a decline in sales at the RF Connector and Cable Assembly segment. The primary contributor for the increase in revenues at Cables Unlimited is the sale of a line of custom cables first introduced by Cables Unlimited in April 2012. Net sales by Cables Unlimited of this custom cabling product were approximately $4.3 million for the fiscal 2013 quarter. The Cables Unlimited segment contributed $5.5 million to the fiscal 2013 quarter sales, an increase of $2.8 million or 103%, over the prior year comparable quarter. The RF Connector and Cable Assembly segment had net sales of $3.2 million, a decrease of $707,000 or 18% from the prior comparable period. The decrease in net sales at RF Connector and Cable Assembly segment is attributable to an industry-wide softening of demand for their products. The RF Wireless segment contributed revenue of $107,000, a decrease of $40,000 or 27% from the prior comparable period. Revenues at the RF Wireless segment decreased primarily due to the winding down of the contract with the Los Angeles County Fire Department. Since the Los Angeles County Fire Department contract for the implementation of a wireless system upgrade to the County Fire Department's existing remote communications equipment was entered into in November 2011 substantially all of the revenues realized by the RF Wireless segment were derived from that contract. Accordingly, the completion of the L.A. County Fire Department contract will result in a continued decrease in revenues by that segment in future periods until other, larger contracts are entered into. The Medical Cabling and Interconnector segment had revenues of $766,000, an increase of $196,000 or 34% over the prior comparable period. The increase in medical cabling revenue was due to increased sales from its existing customers.

Domestically, the Company's net sales increased by $2.4 million, or 34%, to $9.3 million compared to $6.9 million in the prior comparable quarter. Foreign sales decreased by $82,000, or 20%, to $326,000 in the fiscal 2013 quarter compared to $408,000 during the fiscal 2012 quarter primarily due to a decline in cable assembly sales to certain existing international customers in Israel. Management believes that this decline in sales to certain existing international customers in Israel may continue for the remainder of fiscal year 2013. Foreign sales represented approximately 3% and 6% of the Company's net sales during the July 31, 2013 and 2012 fiscal quarters, respectively. Unlike domestic sales, foreign sales tend to consist of larger orders, which result in larger swings in foreign sales as orders are received or filled.

The Company's gross profit as a percentage of sales decreased by 5% to 41% during the fiscal 2013 quarter compared to 46% in the comparable fiscal quarter of the prior year primarily as a result of a change in the product mix due to the larger portion of sales coming from Cables Unlimited, which subsidiary typically operates at a lower gross margin to the Company as a whole. The gross profit percentage for the Cables Unlimited segment remained consistent at 35% during the fiscal 2013 and fiscal 2012 quarters. The gross profit percentage of the RF Connector and Cable Assembly segment also remained consistent at 54% during the fiscal 2013 and fiscal 2012 quarters. However, as a percentage of net sales, net sales for the RF Connector and Cable Assembly segment represented 33% of fiscal 2013 quarter sales compared to 53% of fiscal 2012 quarter sales, and net sales for the Cables Unlimited segment represented 58% of fiscal 2013 quarter sales compared to 37% of fiscal 2012 quarter sales. The gross profit percentage for the RF Wireless segment declined by 14% to 27% for the 2013 quarter primarily as a result of the winding down of the Los Angeles County contract and the impact of certain fixed costs on a lower revenue base. The Medical Cabling and Interconnector segment's gross profit percentage improved by 3% to 42% for the fiscal 2013 quarter from 39% in the fiscal 2012 fiscal quarter due to increased efficiencies.

Engineering expenses represent costs incurred relating to the ongoing development of new products. Engineering expenses increased $52,000 or 20% in the fiscal 2013 quarter to $313,000 compared to $261,000 in the fiscal 2012 quarter as the Company increased its investment in developing new products.

Selling and general expenses increased $195,000, or 10%, in the fiscal 2013 quarter to $2.1 million from $1.9 million in the comparable quarter of the prior fiscal year. The increase in selling and general expenses was primarily a result of increased sales commissions paid at the Cables Unlimited segment as a result of the increase in net sales, an increase in wages and benefits related to an increase in pay rates and headcount and an increase in certain legal and consulting fees related to the sale of a division of the Company.

The provision for income taxes during the fiscal 2013 quarter was $407,000 (or an effective tax rate of approximately 26%), compared to $397,000 in the fiscal quarter 2012 (or an effective tax rate of approximately 34%). Despite the fact that the effective tax rate is significantly lower during the fiscal 2013 quarter, the slight increase in the fiscal 2013 quarter provision for tax is due to the significantly higher income before provision for income taxes during the period. The reduction in the effective tax rate is attributable to the impact of the tax benefit to the Company of disqualifying incentive stock option (ISO) dispositions during the fiscal 2013 quarter, which result in a tax deduction to the Company. As a result of the Company's increase in stock price during 2013, many employees exercised their ISOs and thereafter sold their shares, which transactions resulted in ISO disqualifying dispositions during the fiscal 2013 quarter. Management believes that this trend may not continue for the remainder of fiscal year 2013 and, accordingly, anticipates that the effective tax rate will increase.

Loss from discontinued operations, net of tax, during the fiscal 2013 quarter was $238,000 compared to $40,000 in the fiscal 2012 quarter. During the fiscal 2013 quarter, the Company sold the RF Neulink division and, accordingly, the results of this division are included in discontinued operations for all periods presented. In connection with the sale of RF Neulink, the Company recognized an inventory write-off of $297,000 during the fiscal 2013 quarter. Additionally, the two employees of RF Neulink were provided severance totaling $33,000 during the fiscal 2013 quarter.

Nine Months Ended July 31, 2013 vs. Nine Months Ended July 31, 2012

Net sales for the nine months ended July 31, 2013 increased by 52% or $9.9 million to $29.1 million from $19.2 million during the nine months ended July 31, 2012 primarily due to a significant increase in net sales at the Company's Cables Unlimited subsidiary. The Cables Unlimited segment generated $15.4 million of sales for the nine months ended July 31, 2013, an increase of $9.4 million or 156%, over the prior year comparable period. Most of the increase is due to $10.9 million of sales for the nine months ended July 31, 2013 from Cables Unlimited. Since Cables Unlimited developed and commercially released the custom product line in April 2012, the product was not available for sale during the entire nine-month period ended July 31, 2012. Net sales at the RF Connector and Cable Assembly segment during the nine months ended July 31, 2013 remained relatively unchanged at $10.5 million, increasing by $158,000 or 2%, compared to $10.4 million during the prior year comparable period. The RF Wireless segment contributed $925,000 of net sales in the fiscal 2013 period, an increase of $106,000 or 13% over the comparable 2012 period. Revenues at the RF Wireless segment were impacted by the timing of shipments under the contract with the Los Angeles County Fire Department, which was entered into in November 2011. The Medical Cabling and Interconnector segment had revenues of $2.3 million, an increase of $270,000 or 13% over the prior comparable period, due to increased sales from its existing customers.

Domestic sales increased by $9.9 million, or 55%, to $28.0 million during the nine months ended July 31, 2013 from $18.1 million in the comparable prior year period. Foreign sales remained unchanged at $1.1 million during both the nine months ended July 31, 2013 and 2012. However, management believes that sales to certain existing international customers in Israel may continue to decline for the remainder of fiscal year 2013. Foreign sales represented approximately 4% and 6% of the Company's net sales during the nine month periods ended July 31, 2013 and 2012, respectively.

The Company's gross profit as a percentage of sales remained consistent at 45% during the nine month periods ended July 31, 2013 and 2012. The gross profit percentage for the Cables Unlimited segment was 37% during the nine months ended July 31, 2013, an improvement of 3% over the comparable period a year ago. Gross margins for the Cables Unlimited products increased primarily due to increased efficiencies in production, as well as from the impact of increased production and sales benefiting from certain fixed manufacturing costs. The gross profit percentage of the RF Connector and Cable Assembly segment improved by 2% to 54% primarily due to increased sales of the higher margin connector product line and an adjustment in its product prices that it charges to its customers. As a percentage of net sales, net sales for the RF Connector and Cable Assembly segment represented 36% of sales for the nine months ended July 31, 2013 compared to 54% of net sales for the comparable prior year period, and net sales for the Cables Unlimited segment represented 53% of sales for the nine months ended July 31, 2013 compared to 31% of sales for the prior year comparable period. This change in product mix contributed to the consistency of the gross profit percentage between periods despite the improvement in gross profit percentages at the Cables Unlimited and RF Connector and Cable Assembly segments. The gross profit percentage for the RF Wireless segment improved by 11% to 56% for the nine months ended July 31, 2013 compared to 45% for the nine months ended July 31, 2012 primarily as a result of the Los Angeles County contract and the related revenue earned during the first quarter of the nine month period ended July 31, 2013. The Medical Cabling and Interconnector segment had a 2% increase in its gross profit percentage from 42% during the nine months ended July 31, 2012 to 44% for the nine months ended July 31, 2013 due to increased efficiencies.

Engineering expenses increased $59,000 or 7% to $894,000 during the nine months ended July 31, 2013 compared to $835,000 during the nine months ended July 31, 2012. The increase in engineering expenses was primarily attributable to increased salary expense in connection with efforts devoted to the development of new products.

Selling and general expenses increased by $1.1 million to $6.7 million during the nine months ended July 31, 2013 from $5.6 million in comparable prior year period. The increase in selling and general expenses was primarily due to lump-sum bonus payments to senior management that were not made last year, increased sales commissions at the Cables Unlimited segment driven by the increase in net sales, an increase in wages and benefits related to an increase in pay rates and headcount and an increase in certain legal and consulting fees in connection with the termination and replacement of an employee.

The provision for income taxes during the nine months ended July 31, 2013 was $1.5 million (or an effective tax rate of approximately 28%), compared to $810,000 in the comparable prior year period (or an effective tax rate of approximately 35%). Despite the fact that the effective tax rate is significantly lower during the nine months ended July 31, 2013, the increase in the provision for tax is due to the significantly higher income before provision for income taxes. The reduction in the effective tax rate is attributable to the impact of the tax benefit to the Company of disqualifying dispositions of ISOs during fiscal 2013, which resulted in a tax deduction to the Company. As a result of the Company's increase in stock price during 2013, many employees exercised their ISOs and thereafter sold their shares, which resulted in a significant number of ISO disqualifying dispositions during the current year. Management believes that this trend may not continue for the remainder of fiscal year 2013 and, accordingly, anticipates that the effective tax rate likely will increase.

Loss from discontinued operations, net of tax, during the nine months ended July 31, 2013 was $354,000 compared to $52,000 during the nine months ended July 31, 2012. During the third quarter of 2013, the Company sold the RF Neulink division and accordingly, the results of this division are included in discontinued operations for all periods presented. In connection with the sale of RF Neulink, the Company recognized an inventory write-off of $297,000 during the third quarter of 2013. Additionally, the two employees of RF Neulink were provided severance totaling $33,000 during the third quarter of 2013.

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