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RF Industries, Ltd. (NASDAQ:RFIL)

F3Q 2013 (Qtr End 07/31/2013) Earnings Call

September 12, 2013, 12:00 PM ET

Executives

John Nesbett - Investor Relations, IMS

Howard Hill - Founder, Chief Executive Officer, Principal Accounting Officer, Secretary and Director

James Doss - President

Mark Turfler - Acting Chief Financial Officer and Corporate Secretary

Analysts

Wyatt Carr - Monarch Bay Securities

Operator

Greetings, and welcome to the RF Industries fiscal 2013 third quarter financial results. (Operator Instructions) It is now my pleasure to introduce your host John Nesbett for IMS for RF Industries. Thank you Mr. Nesbett, you may begin.

John Nesbett

Good afternoon and thank you for calling in. On the call today we have Howard Hill, Chief Executive Officer; James Doss, President; and Mark Turfler, Acting Chief Financial Officer of RF Industries. Howard and James will provide an overview of operations and Mark will review the financials, after which we will open the call up for questions.

I'll take a moment to read the Safe Harbor statement. Please note that except for historical statements, statements on this call may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipates, beliefs, expects, intends, 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.

With done, I will now turn the call over to Howard. Go ahead, Howard.

Howard Hill

Thank you, John. Welcome to our third quarter fiscal year 2013 conference call. With me, Mark Turfler, our CFO; James Doss, our President, who will review the financials and other business highlights.

Our third quarter and nine month sales for fiscal year 2013 were another record for RF Industries. Our record third quarter is our fourth consecutive quarter with reported record sales and on our way for a 20th year of profitability.

Our balance sheet remains strong with a healthy cash position, no debt will provide us the ability to support our long-term objective growth and also return capital to our shareholders through dividend. During the past year, we particularly focused on growing our position as a leader provider of full service custom interconnect solutions in the wireless and medical industry.

Cables Unlimited has been our shining star for RF Industries with record sales. CUIs hard work to deliver leading-edge interconnect product to a rapidly growing wireless arena have paid off. The momentum they've build will allow us to leverage our innovative design and manufacturing capability to address the needs of our customers. RFI will focus on opportunities to grow our business with a dynamic, rapidly growing wireless infrastructure arena.

FY 2013 sales for the connector and cable assembly segment remained relatively unchanged during the same period of FY 2012. The wireless segment increased in FY 2013 over the comparable FY 2012. The wireless segment increase were sales from the Los Angeles County Fire Department. The metal cabling and interconnect segment also had sales increased over the comparable period last year due to the increase from existing customers.

During the quarter the company sold out Neulink division. The divesting of RF Neulink division is part of the ongoing strategy to evaluate the performance of the division and better concentrate our energy on resources, and more growth and increased margins for each division. We remain committed to creating shareholder value through the growth of our business and returning capital to our investors with quarterly and special periodic dividend.

I will now turn the conference call to our President, Mr. James Doss. Jim?

James Doss

Thank you, Howard. Hello, everyone. As Howard mentioned, the third quarter is very strong for us. Our Cables Unlimited segment continues to drive our strong performance due to success of fiber and power products, which have gained wide acceptance in the marketplace and seeing increased demand.

Our fiber and power products are high-quality cables designed and targeted towards the wireless service provider, who are updating the 4G network. We're very optimistic about the continued growth in the wireless market and our opportunities to capitalize on this growth.

We see these products and other customized solutions from our company, and that they have a unique ability to offer new and existing customers the alternative they need to remain competitive in this dynamic space. Our Cables Unlimited segment is focused on product innovation and development, and we'll continue to offer new products. In addition to the wireless telecom infrastructure, we also serve the interconnect needs of companies in the medical industrial sector and are seeing more opportunities for our products, as they need more reliable and more sophisticated interconnectivity options.

As expected, we did experience a decline in revenues from the RF Wireless segment during the quarter. Our RF Wireless division is distinctly different from our core connectivity business. At RF Wireless, we provide full service end-to-end communication systems, including hardware, mostly for municipal emergency response systems.

This business is focused towards municipal contracts and with the economic and budget considerations that we have to navigate, some times it can be a bit lumpy. The good news is that this anticipated decline in the wireless segment was offset by the increased revenue in our core businesses, Cables Unlimited and the cable and connector segment.

And related development during the third quarter, we did sell our RF Neulink division. That business designed and manufactured radio modems and receivers that provided high-speed wireless connections over long distances. In recent year, RF Neulink did not contribute meaningfully to the company's growth and profitability.

And in fact, the division contributed less than 1% of RF Industries' total sales for the six months ended April 30, 2013. So with our commitment to an ongoing strategy and to evaluate the performance of each of our divisions and to concentrate efforts and resources in the higher growth and higher margin core components, the divestiture of our Neulink does make sense.

Our balance sheet remain strong, with more than $10 million in cash and no debt, which allows us to invest in our growth, while returning capital to our shareholders, as Howard mentioned.

I'll now turn the call over to Mark, for detailed review and discussions to the financial quarter. Mark?

Mark Turfler

Thank you, Jim. And I welcome our listeners. We had record consolidated net sales of $9.6 million for the quarter ended July 31, 2013, an increase of 31% over the prior-year quarter. This was largely due to the $2.8 million or 103% sales increase in our Cables Unlimited division, due to the continued strong demand for the fiber and power products.

Company-wide gross margin increased from 45.6% in the prior year of third quarter to 41.5% in 2013, largely due to a change in product mix with a larger portion of our sales coming from Cables Unlimited, which typically has lower gross margins than the other segments of our business. We continue to see leverage in our selling and general line, as selling and general expenses for the quarter decreased to 22% of sale from 26% in the third quarter last year.

Third quarter 2013 operating income of $1.6 million increased $395,000 or 34% when compared to the same quarter last year, largely due to the increase in sales of Cables Unlimited. Our third quarter tax provision was $407,000, an effective tax rate of 26% compared to $397,000 or an effective tax rate of 34% for the same quarter last year.

Despite a lower effective tax rate in the third quarter of this year due to the exercise of our incentive stock options by our employees, the increased provision for tax is due to our significantly higher pre-tax income. However, we anticipate that going forward, the tax rate will be more comparable to prior year's effective tax rate.

Income from continuing operations of $1.2 million for the third quarter of fiscal 2013 increased $380,000 or 49% compared to $775,000 for the prior year quarter. Basic and diluted EPS from continuing operations for Q3 2013 was $0.15 per share and $013 per share compared to $0.11 per share and $0.10 per share for a comparable prior year quarter respectively.

As Jim noted earlier, the results from discontinued operations reflects the cost to shutdown and sell our RF Neulink division during the quarter. As a result loss from discontinued operations net of tax for the third quarter 2013 was $238,000 or $0.02 per diluted share compared to $40,000 and no impact on earnings per diluted share for the prior year quarter.

Net income of $917,000 for the third quarter of fiscal 2013 increased to $182,000 or 25% compared to $735,000 for the prior year quarter. Basic and diluted EPS from net income for Q3 2013 was $0.12 per share and $0.11 per share compared to $0.11 and $0.12 per share for the comparable prior year quarter respectively.

On a year-to-date basis, we've reported record nine month net sales of $29.1 million for the nine months of fiscal 2013, an increase of 52% compared to net sales of $19.2 million for the same prior year period. The biggest contributor for this to increase was due to $15.4 million of sales from our Cables Unlimited division.

Earlier today, we issued a corrective press release to clarify that the sales from the entire Cable Unlimited division was $15.4 million rather then the originally published $10.9 million figure, which had only referred to Cables Unlimited custom cable product sales.

On a year-to-date basis, gross profit increased to $13 million and gross margins of 45% in the nine months of fiscal 2013 as compared to gross profit of $8.7 million and gross margin of 45% for the same prior year period. Operating income of $5.4 million for the nine months of fiscal 2013 increased to 138% compared to operating income of $2.3 million for the same prior year period.

Income from continuing operations for the nine months 2013 was $3.9 million or $0.52 per basic and $0.47 per diluted share as compared to $1.5 million or $0.22 per basic and $0.20 per diluted share for the same prior year period.

Net income of $3.6 million for the nine months of fiscal 2013 increased $2.1 million or 146% compared to $1.5 million for the same prior year period. Basic and diluted EPS from net income for the nine months of fiscal 2013 was $0.48 per share and $0.43 per share compared to $0.21 and $0.19 per share for the comparable prior year period respectively.

Turning to the balance sheet at July 31, 2013, we had $10.8 million in cash and cash equivalents, an increase of $5.3 million since yearend, primarily due to cash generated from operations as well as receipt of proceeds from the exercise of stock option employees, while paying out dividends totaling of $1.8 million to our shareholders. In addition to a current ratio of 8.1 we have no debt. As a result, our balance sheet remains extremely strong and provides a significant competitive advantage.

This concludes my discussion of financial results. Howard?

Howard Hill

Thank you, Mark. I'd like to give a special thanks to our employees on their hardworking contribution to our successful growth and to thank our shareholders for their support. We are looking forward to strengthen our financial position in years to come. I truly believe that RF Industries is at the right place at the right time.

So I'd like to turn over the floor to questions. Operator, are you ready -- we are ready for our first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Wyatt Carr with Monarch Bay Securities.

Wyatt Carr - Monarch Bay Securities

I have a couple of questions. The gross margin was due to -- decline was due to product mix. CUI obviously has a lower margin and is now what 53% of revenues.

Howard Hill

Yes.

Wyatt Carr - Monarch Bay Securities

And CUIs margins went around, if I'm not correct, correct me, 35%, is there room there to improve those margins? Is there a target that you have in mind that you could reach?

Howard Hill

Well, we don't -- I think the important part is to a take a look at what we've also done with CUI. When we acquired Cables Unlimited, their gross margin levels at time of our acquisition ran right around 30% acquired. And actually we worked pretty hard in the last couple of years to get them to the level that they are. With the customization that goes into some of this into work, it's very different from the traditional connector and cable assembly business.

We are always looking to try to get increased efficiencies there. But there is with the type of product that they sell, there is high input component cost that we always have to deal with. I think anything between that 35% and 40% range is acceptable for us. Obviously, we would like to be able to get those higher.

But as the market demands more and more of these customized products, I think you're going to see that that they're always going to have some price pressure in there, because of the absolute dollar amounts. However, on the flipside of that Cables Unlimited have done a good job in helping control their SG&A cost and even with their increased sale, they were able to offset some of that margin with some of that decreases in SG&A.

Wyatt Carr - Monarch Bay Securities

And a question, OptiFlex is a big part of your product mix in Cables Unlimited. I guess the question I have is, are you selling this to more than one distributor or are you only qualified with one? Do you have to go through qualification with other distributors, kind of how many distributors are there that could possibly take up the OptiFlex product?

James Doss

Well, the OptiFlex is more of a baseline that we sell other products to all of our distributors through. It does have a limited amount of people who are currently selling it. Why -- we don't obviously tell our customer names on this and disclose that. However, I can say the end-users are very happy with it.

And also I think the important part to remember about OptiFlex is it was a very much a gateway for us to get in and get the opportunity to design other products that are around the OptiFlex that are on the tower and that are needed in that wireless infrastructure buildout. So it's led to other opportunities with multiple distributors for other products.

Howard Hill

It's a brand new icon, so it's really kicking off our end-user. It's new to them also, so it's one of these things that it will ramp up and get bigger and bigger.

Wyatt Carr - Monarch Bay Securities

And in connect, Jim, I think you talked about some new products that were coming in the RF Connect space. Are these in fiber or coax and what kind of traction have you seen?

James Doss

They are more along the lines of traditional coax type products and actually we're starting to see an uptick in some of that business. They center around low [indiscernible] and in they are variety of products. There is probably about 10 different products that we have developed around that. It will take time for us because what happens is when you talked about that qualification process when we introduced these two more distributors for them to go out there and introduce some of their customers, there is a time lag.

So in this quarter, we did see more activity on that than we saw in the previous quarter when we introduced them, but it will take -- we anticipate internally it will take up to a probably a year for that to fully get through all of distributors till we see a sustainable significant sales level. So we still view that as kind of an infant stage for our product development for us.

Wyatt Carr - Monarch Bay Securities

And then I have just one last question and a comment, the question is with what we've seen recently in the connect business, do you see any impact to you of what has occurred with Molex or some of these others.

James Doss

No, not really. I mean, I think you're always going to see some consolidation in any business. I think there is a lot of people that liked the Wireless space and that self components into the whole Wireless industry and I think Molex is probably just one of those companies that somebody sees as an opportunity.

Howard Hill

The large holding company that bought Molex, you know, because they've looked at it and seen the excitement in this Wireless industry. I mean you're looking just in the last few years with the Apple, the iPhone and in the other technologies where we came from just backing on 20 years tremendous, tremendous change.

James Doss

I think it speaks to the overall demand in the market for these type of products.

Wyatt Carr - Monarch Bay Securities

One last comment and that is Howard and Jim and Mark, I really think that you've done a terrific job in paying out shareholders, both special dividends, regular dividends and still generate, your cash has increased from $5 million a year ago to over $10 million now, congratulations on that and thanks for taking care of the shareholders.

James Doss

That's our job.

Operator

We have no further questions at this time. I will now turn the floor back over to management for closing comments.

Howard Hill

Well, thank you very much for looking at us. Wonderful fourth quarter coming up, we'll see some increases around us and we'll see some bounces around us. So note, our type of business is the phone rings and we get the order. Thank you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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