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RFIL > SEC Filings for RFIL > Form 10-Q on 12-Jun-2014All Recent SEC Filings

Show all filings for R F INDUSTRIES LTD

Form 10-Q for R F INDUSTRIES LTD


12-Jun-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 represent a significant portion of our total assets, any material 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. The Company's Cables Unlimited subsidiary designs, develops and manufactures custom connectivity solutions for special projects. Accordingly, Cables Unlimited's revenues fluctuate with the demand for its custom 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. Additionally, the Company has access to a line of credit in the amount of $5.0 million, of which the full amount is available as of April 30, 2014, 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 April 30, 2014, the Company had cash and cash equivalents equal to $13.4 million.

As of April 30, 2014, the Company had $22.7 million in current assets and $1.5 million in current liabilities.

As of April 30, 2014, the Company had no outstanding indebtedness (other than accounts payable, accrued expenses, customer deposits 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 and recent operating results, as well as access to its line of credit, the Company would be able to finance its expansion, if necessary.

In April 2014, the Company announced that it may repurchase up to 500,000 shares of the Company's common stock in open market transactions. The share repurchase program may be suspended or terminated at any time. As of April 30, 2014, no shares have been repurchased pursuant to this program.

The Company generated cash from operating activities of $2.0 million during the six months ended April 30, 2014 primarily due to net income of $742,000 for the six months ended April 30, 2014, $995,000 for changes in operating assets and liabilities and other non-cash charges of $540,000, which were offset by excess tax benefit from stock-based compensation of $277,000.

As of April 30, 2014, the Company had a total of $13.4 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 April 30, 2014, the Company had working capital of $21.2 million and a current ratio of approximately 15:1.

Results of Operations

Three Months Ended April 30, 2014 vs. Three Months Ended April 30, 2013

Net sales for the three months ended April 30, 2014 (the "fiscal 2014 quarter") decreased by 35% or $3.1 million to $5.8 million from $8.8 million for the three months ended April 30, 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 $1.7 million of sales in the fiscal 2014 quarter, a decrease of $2.7 million or 61%, compared to the fiscal 2013 quarter. Most of the revenues generated by Cables Unlimited in the fiscal 2013 quarter were generated by the sale of a single line of new cabling products that Cables Unlimited developed to address the needs of some telecommunications companies. The decrease in net sales at Cables Unlimited during the fiscal 2014 quarter was primarily due to a decline in demand for this project based 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 will depend upon the number of cell site upgrades and, therefore, cannot be accurately estimated. Also contributing to the overall decrease in sales during the fiscal 2014 quarter was a decrease in sales of $255,000 or 7% at the RF Connector and Cable Assembly segment, which generated sales of $3.3 million during the fiscal 2014 quarter compared to $3.6 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 $712,000, a decrease of $119,000 or 14% over the prior comparable period. The decrease in medical cabling revenue was due to decreased sales from a significant existing customer. Due to the slowdown in orders from this significant customer for the Medical Cabling and Interconnector segment, the Company expects a decline in revenues at this segment in subsequent quarters.

The Company's gross profit as a percentage of sales increased by 3% to 48% during the fiscal 2014 quarter compared to 45% in the fiscal 2013 quarter primarily as a result of a change in the product mix. Gross margins at the Cables Unlimited segment typically are lower than in the RF Connector and Cable Assembly segment. Accordingly, as net sales decreased at Cables Unlimited, a proportionately larger portion of sales was generated by the RF Connector and Cable Assembly segment, which typically operates at a higher gross margin compared to the other segments.

Engineering expenses remained relatively consistent in the fiscal 2014 quarter at $214,000 compared to $204,000 in the fiscal 2013 quarter. Engineering expenses represent costs incurred relating to the ongoing development of new products.

Selling and general expenses decreased $169,000, or 9%, in the fiscal 2014 quarter to $1.8 million from $1.9 million in the comparable quarter of the prior fiscal year. The decrease in selling and general expenses was primarily due to lower compensation and benefits expense in connection with a decrease in headcount experienced during the fiscal 2014 quarter, which was partially offset by increased stock-based compensation expense related to the acceleration of certain stock options of a former employee.

The provision for income taxes during the fiscal 2014 quarter was $310,000 (or an effective tax rate of approximately 40%), compared to $522,000 in the fiscal quarter 2013 (or an effective tax rate of approximately 29%). 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 change in the effective tax rate is attributable to changes in the rate resulting from the reversal of cumulative compensation expense related to disqualifying dispositions of incentive stock options.

Income from discontinued operations, net of tax, during the fiscal 2014 quarter was $18,000 compared to a loss from discontinued operations, net of tax, of $110,000 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. During the fiscal 2013 quarter, these discontinued divisions incurred losses from operations; however, these divisions are no longer owned by the Company, but the Company continues to generate royalties in connection with the sale of these divisions.

Six Months Ended April 30, 2014 vs. Six Months Ended April 30, 2013

Net sales for the six months ended April 30, 2014 decreased by 38% or $7.1 million to $11.6 million from $18.7 million for the six months ended April 30, 2013 primarily due to a significant decrease in net sales at the Company's Cables Unlimited segment and, to a lesser extent, to a decrease in net sales in the other two segments. The Cables Unlimited segment generated $3.9 million of sales for the six months ended April 30, 2014, a decrease of $6.0 million or 61%, from the prior year's comparable period. Most of the revenues generated by Cables Unlimited during the six months ended April 30, 2013 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. Also contributing to the overall decrease in sales during the six months ended April 30, 2014 was a decrease in sales of $1.1 million or 15% at the RF Connector and Cable Assembly segment, which generated sales of $6.3 million during the six months ended April 30, 2014 compared to $7.4 million during the prior year comparable period. 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 had revenues of $1.5 million, a decrease of $54,000 or 4% over the prior comparable period. The decrease in medical cabling revenue was due to decreased sales from a significant existing customer.

The Company's gross profit as a percentage of sales increased slightly by 1% to 46% during the six months ended April 30, 2014 compared to 45% in the comparable prior year period primarily as a result of a change in the product mix with a larger portion of sales coming from the RF Connector and Cable Assembly segment, which typically operates at a higher gross margin compared to the other segments. The overall increase in gross margins due to the change in product mix was partially offset by a decrease in gross margins for the Cables Unlimited products resulting from certain fixed manufacturing costs spread over a lower revenue base, as well as lower pricing due to increased competition and a change in customers.

Engineering expenses increased $71,000 or 18% during the six months ended April 30, 2014 to $470,000 compared to $399,000 during the comparable prior year period due to increased salary expense related to engineering activities. Engineering expenses represent costs incurred relating to the ongoing development of new products.

Selling and general expenses decreased $534,000, or 12%, during the six months ended April 30, 2014 to $3.8 million from $4.3 million in the comparable prior year period. The decrease in selling and general expenses was primarily due to lower compensation and benefits expense as a result of a decrease in headcount during fiscal 2014. In addition, the six months ended April 30, 2013 included lump-sum bonus payments to senior management and increased legal and consulting fees in connection with the termination and replacement of an employee. These decreases in selling and general expenses were partially offset by increased stock-based compensation expense during fiscal 2014 related to the acceleration of certain stock options to a former employee.

The provision for income taxes during the six months ended April 30, 2014 was $393,000 (or an effective tax rate of approximately 35%), compared to $1.1 million in the comparable prior year period (or an effective tax rate of approximately 28%). The significant decrease in the provision for tax for the six months ended April 30, 2014 is due to the significantly lower income before provision for income taxes during the period. Additionally, the change in the effective tax rate is attributable to changes in the rate resulting from the reversal of cumulative compensation expense related to disqualifying dispositions of incentive stock options.

Income from discontinued operations, net of tax, during the six months ended April 30, 2014 was $19,000 compared to a loss from discontinued operations, net of tax, of $85,000 during the six months ended April 30, 2013. 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. During the six months ended April 30, 2014, these discontinued divisions incurred losses from operations; however, these divisions are no longer owned by the Company, but the Company continues to generate royalties in connection with the sale of these divisions.

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