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RFIL > SEC Filings for RFIL > Form 10-Q on 13-Mar-2014All Recent SEC Filings

Show all filings for R F INDUSTRIES LTD

Form 10-Q for R F INDUSTRIES LTD


13-Mar-2014

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, 2013 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"). U.S. GAAP requires the Company to make certain estimates and judgments that may affect the financial statements. One of the accounting policies that involves significant judgments and estimates concerns our inventory valuation. Inventories are valued at their weighted average cost. Certain items in inventory may be considered obsolete or excess and, as such, we periodically review our inventories for excess and slow moving items and make provisions as necessary to properly reflect inventory value. 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 affect our net worth and future earnings.

Another accounting policy that involves significant judgments and estimates is our accounts receivable allowance valuation, which requires us to make estimates about matters that are inherently uncertain. 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 impairment, which requires us to make assumptions and judgments regarding expected future cash flows. 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 stock option grants. This valuation is affected by the Company's stock price as well as assumptions regarding a number of inputs which involve significant judgments and estimates. These inputs include the expected term of employee stock options, the expected volatility of the stock price, the risk-free interest rate and expected dividends.

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 connectivity solutions are used across diversified, high growth markets including wireless carriers and infrastructure and medical and industrial companies.

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 January 31, 2014, the Company had cash and cash equivalents equal to $12.8 million.

As of January 31, 2014, the Company had $22.6 million in current assets and $1.8 million in current liabilities.

As of January 31, 2014, 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 $898,000 during the three months ended January 31, 2014 primarily due to net income of $265,000 for the three months ended January 31, 2014 and $685,000 for changes in operating assets and liabilities, which were offset by excess tax benefit from stock-based compensation of $237,000 and other non-cash charges of $185,000.

As of January 31, 2014, the Company had a total of $12.8 million of cash and cash equivalents compared to a total of $11.9 million of cash and cash equivalents as of October 31, 2013. As of January 31, 2014, the Company had working capital of $20.8 million and a current ratio of approximately 12:1.

Results of Operations

Three Months Ended January 31, 2014 vs. Three Months Ended January 31, 2013

Net sales for the three months ended January 31, 2014 (the "fiscal 2014 quarter") decreased by 41% or $4.0 million to $5.9 million from $9.9 million for the three months ended January 31, 2013 (the "fiscal 2013 quarter") primarily due to a significant decrease in net sales at the Company's Cables Unlimited segment. The Cables Unlimited segment generated $2.1 million of sales in the fiscal 2014 quarter, a decrease of $3.3 million or 61%, over the fiscal 2013 quarter. Most of the revenues generated by Cables Unlimited in both the fiscal 2013 quarter and the fiscal 2014 quarter were generated by the sale of a single line of new cabling products. The decrease in net sales at Cables Unlimited was primarily due to a decline in demand for this new line of cabling products. Orders for Cables Unlimited's new cabling product are primarily dependent upon the number of cellular telephone sites that are being retrofitted for 4G technologies and, to a lesser extent, on the availability of other competing products. Accordingly, the future demand for this product cannot be accurately estimated. Also contributing to the overall decrease in sales during the fiscal 2014 quarter was a decrease in sales of $845,000 or 22% at the RF Connector and Cable Assembly segment, which generated sales of $3.0 million during the fiscal 2014 quarter compared to $3.8 million during the fiscal 2013 quarter. The decrease in net sales at the RF Connector and Cable Assembly segment is attributable to an industry-wide softening of demand for RF cable and connector products. The Medical Cabling and Interconnector segment generated revenues of $751,000, an increase of $64,000 or 9% over the prior comparable period. The increase in medical cabling revenue was due to increased sales from existing customers.

The Company's gross profit as a percentage of sales decreased by 2% to 44% during the fiscal 2014 quarter compared to 46% in the fiscal 2013 quarter primarily due to a decline in gross margins at the Cables Unlimited segment. Gross margins for the Cables Unlimited products decreased primarily due to certain fixed manufacturing costs spread over a lower revenue base, as well as lower pricing due to increased competition and a change in customers. This decrease was partially offset by increases at the RF Connector and Cable Assembly and the Medical Cabling and Interconnector segments during the fiscal 2014 quarter due to increased efficiencies.

Engineering expenses decreased $33,000 or 11% in the fiscal 2014 quarter to $256,000 compared to $289,000 in the fiscal 2013 quarter due to decreased salary expense related to engineering activities. Engineering expenses represent costs incurred relating to the ongoing development of new products.

Selling and general expenses decreased $271,000, or 12%, in the fiscal 2014 quarter to $2.0 million from $2.3 million in the comparable quarter of the prior fiscal year. The decrease in selling and general expenses was primarily because the fiscal 2013 quarter included lump-sum bonus payments to senior management, as well as increased legal and consulting fees during the fiscal 2013 quarter in connection with the termination and replacement of an employee.

The provision for income taxes during the fiscal 2014 quarter was $82,000 (or an effective tax rate of approximately 24%), compared to $564,000 in the fiscal quarter 2013 (or an effective tax rate of approximately 28%). The significant decrease in the fiscal 2014 quarter provision for tax is due to the significantly lower income before provision for income taxes during the period. Additionally, the reduction in the effective tax rate is attributable to the impact of the tax benefit to the Company of disqualifying incentive stock option dispositions during the fiscal 2014 quarter, which result in a tax deduction to the Company. Management believes that this trend may not continue for the remainder of fiscal year 2014 and, accordingly, anticipates that the effective tax rate will increase.

Income from discontinued operations, net of tax, during the fiscal 2014 quarter was $1,000 compared to $25,000 in the fiscal 2013 quarter. During fiscal 2013, the Company sold its RadioMobile and RF Neulink divisions and, accordingly, the results of these divisions are included in discontinued operations for all periods presented.

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