RF Industries, Ltd.
Q3 2018 Earnings Call Transcript

Published: 13 Sep 2018

[Operator:]

Good day, everyone and welcome to the RF Industries Third Quarter Fiscal 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, September 12, 2018. At this time, I would like to turn the call over to Mr. Todd Kehrli of MKR Group. Please go ahead.

[Todd Kehrli:]

Thank you, operator. Good afternoon and welcome to RF Industries third quarter fiscal 2018 financial results conference call. With me on today’s call are RF Industries’ President and CEO, Rob Dawson and Chief Financial Officer, Mark Turfler. Before I turn the call over to Rob and Mark, I would like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its third quarter fiscal 2018 financial results. That release is available on the company’s website at rfindustries.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company’s website. I would like to remind everyone that on today’s call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934. When used, the words anticipates, beliefs, expects, intend, future and other similar expressions, identify forward-looking statements. These forward-looking statements reflect management’s current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of new products and other risks and uncertainties discussed in the company’s periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. I will now turn the conference call over to Rob Dawson, President and Chief Executive Officer. Rob?

[Rob Dawson:]

(Audit Start 2

[Mark Turfler:]

Thank you, Rob and good afternoon, everyone. Our second highest ever quarter sales of $13.9 million increased 77% or $6 million from the prior year quarter. The majority of the increase was from our Custom Cabling segment, highest shipments of custom fiber optics cable, copper cabling and other products. Gross profit for the quarter increased by 106% from a year ago to 4.6 million, while gross margins improved to 33% from 28%. The year-over-year increase in gross margin was primarily due to growth in sales, which had the effect of spreading certain fixed manufacturing costs over a larger revenue base. Selling and general expenses were $2.1 million, an increase of $300,000 over the prior year quarter, due to higher compensation costs related to the strong sales gains. Despite this increase in expenses, our selling and general expenses as a percentage of sales declined to 15% of sales, compared to 23% of sales in the third quarter last year, reflecting the company's increased operational efficiencies. Our second highest ever quarter net income of $1.7 million or $0.18 per diluted share increased significantly from net income of $192,000 or $0.02 per diluted share in the third quarter of last year. Net margin for the third quarter was 13% compared to 3% in the third quarter last year. Turning to the first nine months of fiscal 2018, I will touch on some of our results that I believe are worth highlighting. Net sales were $47 million, the highest ever sales for the first nine month period, an increase of 111% or 25 million from the same period last year. Gross profit increased by $10 million to $16 million, while gross margins increased to 34% from 27%. But both selling and general expenses increased $2 million, as a percentage of sales, declined to 17% of sales from 25% of sales. Net income was 5.4 million or $0.57 per diluted share, the highest ever net income and EPS for the first nine month period compared to net income of 77,000 or one penny per share for the same period last year. The decrease in our effective income tax rate for the first nine months of fiscal 2018 was obviously due to the tax act and the benefit of R&D tax credits. The company has invested a majority of the savings that we realized from the tax act into our amazing team with an additional chunk spent on key resources to improve our market position. Turning to our cash flow and liquidity. We generated $6 million of cash from operations for the nine month period or $0.60 per share, while also providing our shareholders, a return on their investment of a $0.06 per share cash dividend. Total cash and cash equivalents were nearly $12 million at our most recent quarter end. As previously mentioned by Rob, our current backlog stands at approximately $11 million, which has largely been what we had at the beginning of our third quarter. That concludes my discussion. I’ll now turn the call back to Rob.

[Rob Dawson:]

(Audit Start 17

[Operator:]

[Operator Instructions] We’ll take our first question from Orin Hirschman with AIGH Investment Partners.

[Orin Hirschman:]

Hi. Congratulations on the results.

[Rob Dawson:]

Thanks, Orin.

[Orin Hirschman:]

In terms of the 5G build out, any thoughts as to when that really begins to gain steam for you? I know, it started to trickle in just a drop, but really hasn’t had the big effect yet. There has been lots of announcements publicly, which is a lot different than six months or nine months ago, and there's also been -- it appears at least to us on the base case inside in terms of standardizing hardware and software upgradability, as all of these announcements I think today or yesterday in terms of four cities coming from one of the majors, when does it begin to really become more of a business and flashes [ph] to the state business for you?

[Rob Dawson:]

Yeah. Good question. So, it's a hot topic for us. Obviously, we've been talking about the impending events of 5G for some time, and yeah, it’s not only in the last week, but in the last quarter or so, we've learned a lot more about the various topologies that the different carriers are going with from a design perspective. So for us, I think, we're just starting to see the beginning of it. Some purchase orders that have rolled in, in the last couple of months are specifically related to 5G, and we can identify that. We can't always tell when a product is being purchased for 5G necessarily. But in this case, we can and we know that they are products that we expect in specifically for 5G with one of the carriers. So, what we're seeing is start, it seems like it’s picking up steam at this point, but I wouldn't say that we're in the full throes of the excitement around it just yet. It is kind of just getting going over the last couple of months after a lot of conversation about it over the last few quarters.

[Orin Hirschman:]

Great. And a special note of thanks on the gross margin, even with quarter-to-quarter lower sales, the gross margin was quite incredible. Is there more room to go there?

[Rob Dawson:]

Yes. So, you're welcome first on that. I’m glad that made you happy. We think they are -- being in the low-to-mid 30s, I think, it is a good spot for us at the moment. I think if we can do better at some of this longer-term business where we can take some cost out of the supply chain, both from a supplier perspective as well as just managing our workforce and our workload a little more easily, a lot of that hits on the gross profit line. So that'll help. And then the last piece is, the better we do with getting influence into a bill of materials where we can include more of our specifically manufactured products that are our brands where we have higher margin on those products. If we can include more of those in our bill of materials versus using someone else's materials, that also gives us some upside on that. So I think we're -- I feel pretty good about the low-to-mid 30s, especially compared to where we were a year ago. I think, there may be a little bit of upside, but it’s going to take some work for us to be able to make that happen. So I think as far as expectations going forward, I think the last couple of quarters are kind of a good indication of where we see margins kind of maintaining.

[Orin Hirschman:]

Okay. And just one other question, if I may, on the acquisition strategy. As you’re clearly looking to things that are anti-dilutive as well and especially with the cash generation becoming more steady here and significant and obviously allowing you to have borrowing power that the company never had before, can it be done using primarily borrowed fund/available cash as opposed to having to use stock?

[Rob Dawson:]

So I certainly think it can. I mean, the good news is not only do we have a solid cash position that continues to increase, and with our cash flow the way it is, we expect that to keep going up. At the same time, we have no debt. So that allows us a lot of flexibility and deal structure of how we might want to finance something. With that said, stock is at a solid number, and it could be helpful in doing some deals, but I don't think it's necessarily required. So it's really going to come down to what is the deal and who is it that we're specifically talking about sidewise and what structure makes the most sense. But I think your point is a very good one and I don't think necessarily that stock is required, but it's really going to depend on a specific situation.

[Operator:]

[Operator Instructions] With no further questions in the queue, I would like to turn the call back over to management for any additional or closing remarks.

[Rob Dawson:]

Great. Thank you, Ann. I appreciate that. Thanks everyone for your interest and support in RF Industries. Mark and I look forward to reporting our fiscal 2018 fourth quarter and full year results in December. Thanks for joining our call. Have a great day and we look forward to talking to you soon.

[Operator:]

This does conclude today’s conference. We thank you for your participation. You may now disconnect. (Audit End)