RF INDUSTRIES, LTD. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements and related disclosures have been prepared
in accordance with
Revenue Recognition
Revenue is recorded in an amount that reflects the consideration to which we
expect to be entitled in exchange for goods or services promised to customers.
In accordance with ASC ("Accounting Standards Codification") 606, we follow a
five-step model to: (1) identify the contract with our customer; (2) identify
our performance obligations in our contract; (3) determine the transaction price
for our contract; (4) allocate the transaction price to our performance
obligations; and (5) recognize revenue when (or as) each performance obligation
is satisfied. In accordance with this accounting principle, we recognize revenue
using the output method at a point in time when finished goods have been
transferred to the customer and there are no other obligations to customers
after the title of the goods have transferred. Title of goods are transferred
based on shipping terms for each customer - for shipments with terms of
Inventories
Inventories are stated at the lower of cost or net realizable value, with cost determined using the weighted average cost method of accounting. 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 makes provisions as necessary to properly reflect inventory value. Because inventories have, during the past couple years, represented up to one-fourth 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.
Allowance for Doubtful Accounts
We record our allowance for doubtful accounts based upon our assessment of various factors. We consider historical experience, the age of the accounts receivable balance, credit quality of our customers, current economic conditions and other factors that may affect a customer's ability to pay.
Long-Lived Assets Including Goodwill
We assess property, plant and equipment and intangible assets, which are considered definite-lived assets, for impairment. Definite-lived assets are reviewed when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment and intangible assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value.
We amortize our intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment.
We test our goodwill and trademarks and indefinite-lived assets for impairment at least annually or more frequently if events or changes in circumstances indicate these assets may be impaired. These events or circumstances require significant judgment and could include a significant change in the business climate, legal factors, operating performance indicators, competition and sale or disposition of all or a portion of a division. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
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Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We account for uncertain tax positions by determining if it is "more likely than not" that a tax position will be sustained by the appropriate taxing authorities upon examination based on the technical merits of the position. An uncertain income tax position is not recognized if it has less than a 50% likelihood of being sustained. We recognize interest and penalties related to certain uncertain tax positions as a component of income tax expense and the accrued interest and penalties are included in deferred and income taxes payable in our consolidated balance sheets. See Note 8 to the Consolidated Financial Statements included in this Report for more information on our accounting for uncertain tax positions.
The calculation of the tax provision involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on our financial condition and operating results.
Stock-based Compensation
We use the Black-Scholes model to value our stock option grants. This valuation is affected by our 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For recently issued accounting pronouncements that may affect us, see Note 1 of Notes to Consolidated Financial Statements.
OVERVIEW
During the periods covered by this Annual Report, we marketed a variety of
connector products, including connectors and cables, standard and custom cable
assemblies, wiring harnesses and fiber optic cable products to numerous
industries for use in thousands of products. We aggregate our operating
divisions into segments that have similar economic characteristics and are
similar in the majority of the following areas: (1) the nature of the product
and services; (2) the nature of the production process; (3) the type or class of
customer for their products and services; (4) the methods used to distribute
their products or services; and (5) if applicable, the nature of the regulatory
environment. We have two reportable segments - the
The RF Connector segment was comprised of two divisions while the Custom Cabling
segment was comprised of four divisions. The five divisions that met the
quantitative thresholds for segment reporting in the fiscal year ended
Revenues generated from the Custom Cabling segment were from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 63% of the Company's total sales, and revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 37% of total sales for fiscal 2022. The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream when compared to the Custom Cabling segment. The Custom Cabling segment mostly designs, manufactures, and sells customized cabling and wireless-related equipment under larger project-based purchase orders. Accordingly, the Custom Cabling segment is more dependent upon larger project orders, and its revenues, therefore, may be more volatile than the revenues of the RF Connector segment.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on future developments, including the duration
and spread of the pandemic and related actions taken by domestic and
international jurisdictions to prevent disease spread, all of which are
uncertain and cannot be predicted. While the majority of the outbreak impacted
our performance for the years ended
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In
Financial Condition
The following table presents certain key measures of financial condition as of
2022 2021
Amount % Total Assets Amount % Total Assets
Cash and cash equivalents $ 4,532 5.1 % $ 13,053 26.3 %
Current assets 46,247 51.6 % 40,648 81.9 %
Current liabilities 19,536 21.8 % 9,370 18.9 %
Working capital 26,711 29.8 % 31,278 63.0 %
Property and equipment, net 3,173 3.5 % 708 1.4 %
Total assets 89,566 100.0 % 49,648 100.0 %
Stockholders' equity 41,869 46.7 % 39,603 79.8 %
Liquidity and Capital Resources
Historically, we have been able to fund our liquidity and other capital
requirements from funds we generated from operations. On
As of
As of
As of
As of
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Our goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment. In the past, we have purchased all additional equipment, or financed some of our equipment and furnishings requirements through leases. Currently, no additional capital equipment purchases have been identified that would require significant additional leasing or capital expenditures during the next twelve months. We also believe that based on our current financial condition, our current backlog of unfulfilled orders and our anticipated future operations, we would be able to finance our expansion, if necessary.
From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base. Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions. Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources. Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund any acquisitions we may undertake in the future.
Results of Operations The following summarizes the key components of our consolidated results of operations for the fiscal years endedOctober 31, 2022 and 2021 (in thousands, except percentages): 2022 2021 % of Net % of Net Amount Sales Amount Sales Net sales$ 85,254 100.0 %$ 57,424 100.0 % Cost of sales 60,705 71.2 % 39,656 69.1 % Gross profit 24,549 28.8 % 17,768 30.9 % Engineering expenses 2,913 3.4 % 1,479 2.6 % Selling and general expenses 19,448 22.8 % 11,874 20.7 % Operating income 2,188 2.6 % 4,415 7.7 % Other (loss) income (601 ) -0.7 % 2,802 4.9 % Income before provision for income taxes 1,587 1.9 % 7,217 12.6 % Provision for income taxes 139 0.2 % 1,036 1.8 % Consolidated net income 1,448 1.7 % 6,181 10.8 %
Net sales for the year ended
Net sales in the Custom Cabling segment increased by
Gross profit for fiscal 2022 increased by
Engineering expenses increased
Selling and general expenses increased by
Other loss for fiscal 2022 is primarily interest expense of
The provision for income taxes was
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For fiscal 2022, net income was
Inflation and Rising Costs
The cost to manufacture the Company's products is influenced by the cost of raw materials and labor. The Company has recently experienced higher costs as a result of the increasing cost of labor and the increasing cost of raw materials. The cost of raw materials is due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation. Labor costs have risen recently as a result of increases in the minimum wage laws and an increased demand for workers. The Company may, from time to time, try to offset these cost increases by increasing the prices of its products. However, because the prices of certain of the Company's products, particularly those under longer-term manufacturing contracts for communications related products, are fixed until the goods are manufactured and delivered, implementing price increases frequently is often not feasible.
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