What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-10 compared with 2020-06-11 · 54 added, 54 removed, 114 unchanged (49% of the section changed)

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Allowance for Doubtful Accounts

We record allowance for doubtful accounts based upon our assessment of various factors.

We record an 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.

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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 requires 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.

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.

Warranty Reserve

We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schrofftech division within the Custom Cabling and Manufacturing Assembly segment.

We recognize an accrued warranty liability for the estimated claims to remedy potential deficiencies of quality or performance of our products in the Schroff Technologies International, Inc.

(“Schrofftech”) division within the Custom Cabling and Manufacturing Assembly segment.

The product warranties extend over various periods, depending upon the product subject to the warranty.

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Earn-out Liability

The purchase agreement for the acquisition of Schroff Technologies International, Inc.

(“Schrofftech”) provides for an earn-out payment of up to $2,400,000, which amount is earned through October 31, 2022.

The purchase agreement for the acquisition of Schrofftech provides for an earn-out payment of up to $2,400,000, which amount is earned through October 31, 2021.

The initial earn-out liability was valued at its fair value using an option pricing based approach with a risk-neutral framework using Black Scholes due to the option-like nature of the earn-out payout structure.

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and (5) if applicable, the nature of the regulatory environment.

For the six months ended April 30, 2020, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which accounted for 69% of total sales.

Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 31% of total sales for the six months ended April 30, 2020.

For the nine months ended July 31, 2020, most of our revenues were generated from the Custom Cabling segment from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 67% of the Company’s total sales.

Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 33% of total sales for the nine months ended July 31, 2020.

In March 2020, the World Health Organization (the “WHO”) declared coronavirus (“COVID-19”) a pandemic emergency.

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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.

The outbreak impacted our performance for the three and six months ended April 30, 2020.

The outbreak impacted our performance for the three and nine months ended July 31, 2020.

We currently expect the decline caused by the economic slowdown to persist through the remainder of 2020.

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subsidiary in Long Island, New York, was particularly affected as many employees stayed at home and as local customers shut down or otherwise delayed, deferred or cancelled orders for our products.

Because of the severe impact that COVID-19 has on our Northeastern operations, in May 2020 we applied for and received a $2.8 million of loans (the “PPP Loans”) under the Paycheck Protection Program of the CARES Act.

The funds from the PPP Loans are being used to retain employees, maintain payroll and benefits, and make lease and utility payments.

Because of the impact that COVID-19 has on our Northeastern operations, in May 2020 we applied for and received loans under the Paycheck Protection Program (“PPP”) of the CARES Act totaling approximately $2.8 million (“PPP Loans”).

The funds from the PPP Loans were used to retain employees, maintain payroll and benefits, and make lease and utility payments.

Without the PPP Loans, we would have made material reductions in our workforce (particularly at Cables Unlimited).

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To the extent not forgiven, the PPP Loans have a two-year term, a fixed interest rate of 1%, and principal and interest payments are deferred for six months.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill impairment indicators as of April 30, 2020.

Although no goodwill impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer and those losses could be material.

We considered the impact of the COVID-19 related economic slowdown on our evaluation of goodwill impairment indicators as of July 31, 2020.

Although no goodwill impairment indicators were identified, it is possible that impairments could emerge as the impact of the crisis becomes clearer, and those impairment losses could be material.

Liquidity and Capital Resources

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While we still believe that our existing current assets, the amount of cash we anticipate will be generated from on-going operations, and funds we received from the PPP Loans collectively will be sufficient to fund our anticipated liquidity and capital resource needs for at least twelve months from the date of this filing, there is some uncertainty because of the unknown future impact of COVID-19 pandemic on our business.

Our existing assets and the cash expected to be generated from operations, including its current backlog of unfulfilled orders, will be sufficient during the current fiscal year based on the following:

As of April 30, 2020, we had a total of $14.1 million of cash and cash equivalents compared to a total of $12.5 million of cash and cash equivalents as of October 31, 2019.

As of April 30, 2020, we had working capital of $23.5 million and a current ratio of approximately 5.1:1.

Despite a decrease in sales as a result of the COVID-19 pandemic, our cash and cash equivalents increased from October 31, 2019 due to the timing of prior sales and the collection of outstanding accounts receivables, resulting in a decrease in the accounts receivable balance by $7.2 million, from $12.2 million as of October 31, 2019 to $5.0 million as of April 30, 2020.

As of April 30, 2020, we had $29.2 million in current assets and $5.7 million in current liabilities.

As mentioned above, since April 30, 2020 we have received $2.8 million in PPP Loans, which funds will provide us with additional liquidity.

As of April 30, 2020, we had $5.7 million of backlog, compared to $6.1 million as of October 31, 2019.

Nevertheless, we believe that our existing assets and the cash we expect to generate from operations, including from our current backlog of unfulfilled orders, will be sufficient to fund our liquidity needs during the next twelve months from the date of this filing based on the following:

As of July 31, 2020, we had a total of $15.6 million of cash and cash equivalents compared to a total of $12.5 million of cash and cash equivalents as of October 31, 2019.

As of July 31, 2020, we had working capital of $25.2 million and a current ratio of approximately 5.2:1.

Despite a decrease in sales as a result of the COVID-19 pandemic, our cash and cash equivalents increased from October 31, 2019 due to the receipt of the PPP Loans, and the timing of collections of outstanding accounts receivables, resulting in a decrease in the accounts receivable balance by $7.2 million, from $12.2 million as of October 31, 2019 to $5.0 million as of July 31, 2020.

As of July 31, 2020, we had $31.2 million in current assets and $4.8 million in current liabilities.

As of July 31, 2020, we had $5.7 million of backlog, compared to $6.1 million as of October 31, 2019.

Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited.

Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.

We generated cash of $1.5 million during the six months ended April 30, 2020 due largely to the collection of accounts receivables ($7.5 million) that was outstanding as of October 31, 2019.

The cash collected from our accounts receivables and the increase in cash from noncash credits from depreciation and amortization ($0.5 million) and from stock-based compensation expense ($0.3 million) was partially offset by the net cash used in the purchase of Schrofftech ($3.9 million), net loss of $158,000, and a decrease in accounts payable ($1.1 million) and accrued expenses ($0.9 million) primarily due to the payout of prior year bonuses.

In addition, during the six months ended April 30, 2020, we received $0.4 million from the exercise of stock options and paid out $0.4 million in dividends.

The dividends were declared before the full impact of the COVID-19 pandemic was realized.

We generated cash of $3.1 million during the nine months ended July 31, 2020 due largely to the receipt of the PPP Loans ($2.8 million) and the collection of accounts receivables ($7.4 million) that were outstanding as of October 31, 2019.

The cash received from the PPP Loans and collected from our accounts receivables, and the increase in cash from non-cash credits from depreciation and amortization ($0.8 million) and from stock-based compensation expense ($0.4 million), was partially offset by the net cash used in the purchase of Schrofftech ($3.9 million), net loss of $0.2 million, and a decrease in accounts payable ($1.3 million) and accrued expenses ($1.6 million) primarily due to the payout of prior year bonuses.

In addition, during the nine months ended July 31, 2020, we received $0.4 million from the exercise of stock options and paid out $0.4 million in dividends.

The current year dividends were declared before the full impact of the COVID-19 pandemic was realized.

We do not anticipate needing material additional capital equipment in the next twelve months.

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All outstanding principal and interest is due and payable on December 1, 2021.

As of April 30, 2020, we were in compliance with all loan covenants.

As of July 31, 2020, we were in compliance with all loan covenants.

Additionally, as of the date of this report, we have not used the LOC and accordingly, the entire amount of the LOC is currently available.

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Results of Operations

Three Months Ended April 30 , 2020 vs.

Three Months Ended April 30 , 2019

Net sales of $10.4 million decreased by 24%, or $3.2 million, for the three months ended April 30, 2020 (the “fiscal 2020 quarter”) compared to the three months ended April 30, 2019 (the “fiscal 2019 quarter”).

Three Months Ended July 31 , 2020 vs.

Three Months Ended July 31 , 2019

Net sales were $9.5 million, a decrease of 39%, or $6.0 million, for the three months ended July 31, 2020 (the “fiscal 2020 quarter”) compared to the three months ended July 31, 2019 (the “fiscal 2019 quarter”).

Net sales for the fiscal 2020 quarter at the Custom Cabling segment decreased by $6.1 million, or 51%, to $5.9 million, compared to $12.0 million in the fiscal 2019 quarter.

The decrease was primarily in our project-based business resulting from the slowdown in carrier spending.

This decrease was partially offset by additional sales contributed by the newly acquired Schrofftech and C Enterprises, Inc.

subsidiaries (we did not own Schrofftech in the fiscal 2019 quarter, and only owned C Enterprises for six weeks in the 2019 quarter).

The decrease was primarily in our project-based business due to COVID-19 where we saw project delays with distributed antenna systems (DAS) and small cell as there were difficulties gaining site zoning approvals, lack of building and site access and the availability of work crews.

In addition, we continued to see a general slowdown in the wireless macro and tower site business which further impacted our sales.

This decrease was partially offset by additional sales contributed by the newly acquired Schrofftech subsidiary as we did not own Schrofftech in the fiscal 2019 quarter.

Net sales for the fiscal 2020 quarter at the RF Connector segment increased by $0.1 million, or 4%, to $3.6 million as compared to $3.5 million in the fiscal 2019 quarter.

Gross profit for the fiscal 2020 quarter decreased by $1.5 million to $2.6 million and gross margins decreased to 24.9% of sales from 30.0% of sales in the fiscal 2019 quarter.

The decrease in gross profit and gross margins was primarily due to lower sales in the project-based business that resulted in lower coverage of fixed production costs, product mix at the Custom Cabling segment, and increased sales at the C Enterprises subsidiary, whose gross margins are lower than the blended margin of our other divisions.

Engineering expenses increased $0.2 million to $0.5 million for the fiscal 2020 quarter compared to $0.3 million in the fiscal 2019 quarter primarily due to the absorption of the engineering costs of the newly acquired Schrofftech, a company that we did not own in fiscal 2019, and the expenses for a full quarter of C Enterprises, a company that we acquired on March 15, 2019.

Gross profit for the fiscal 2020 quarter decreased by $1.5 million to $2.7 million due to the decrease in net sales, while gross margins increased to 28.6% of sales from 27.5% of sales in the fiscal 2019 quarter.

The increase in gross margins was primarily due to the product mix at the Custom Cabling segment.

Engineering expenses remained fairly consistent between the fiscal 2020 quarter and the fiscal 2019 quarter at $0.4 million.

Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses decreased $0.2 million to $2.2 million (22% of sales) compared to $2.4 million (18% of sales) in the second quarter last year primarily due to the decrease in valuation of Schrofftech’s earn-out liability, partially offset with (i) the selling and general expenses of the Schrofftech subsidiary and (ii) a full quarter of selling and general expenses of the C Enterprises subsidiary (last year, we only owned C Enterprises for part of the fiscal quarter).

Selling and general expenses decreased by $0.1 million to $2.5 million (26% of sales) compared to $2.6 million (17% of sales) in the third quarter last year primarily due to the decrease in valuation of Schrofftech’s earn-out liability.

The decrease was partially offset by (i) the addition of the selling and general expenses of the newly acquired Schrofftech subsidiary, and (ii) the severance obligation payable upon an officer’s termination, which included a severance cash payout of $93,500 and the non-cash expense resulting from the accelerated vesting of the officer’s unvested options totaling approximately $58,000.

Additionally, total selling and general expenses in the current quarter included $0.2 million of amortization expense, an increase of $0.1 million over last year as a result of the acquisition of Schrofftech, and $0.2 million in stock-based compensation expense.

For the fiscal 2020 quarter, pretax income (loss) for the Custom Cabling segment and the RF Connector segment was $(0.9) million and $0.7 million, respectively, as compared to $1.1 million and $0.3 million for the comparable second quarter last year.

The pretax loss at the Custom Cabling segment in the second quarter of fiscal 2020 was primarily due to the lower sales in the project-based business resulting from the slowdown in carrier spending.

The provision for income taxes was 1% and 23% of income before income taxes for the fiscal 2020 quarter and the fiscal 2019 quarter, respectively.

The change in the effective tax rate from the fiscal 2019 quarter to fiscal 2020 quarter was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to the Company’s forecasted book income in each period.

For the fiscal 2020 quarter, pretax (loss) income for the Custom Cabling segment and the RF Connector segment was $(1.0) million and $0.8 million, respectively, as compared to $1.1 million and $0.2 million for the comparable third quarter last year.

The pretax loss at the Custom Cabling segment in the fiscal 2020 quarter was primarily due to the lower sales in the project-based business resulting from the slowdown in carrier spending.

The provision or benefit for income taxes was 63% and 21% of (loss) income before income taxes for the fiscal 2020 quarter and the fiscal 2019 quarter, respectively.

For the fiscal 2020 quarter, net loss was $0.1 million and fully diluted loss per share was $0.01 per share as compared to a net income of $1.0 million and fully diluted earnings per share of $0.11 per share for the fiscal 2019 quarter.

For the fiscal 2020 quarter, the diluted weighted average shares outstanding was 9,714,700 as compared to 9,872,899 for the fiscal 2019 quarter.

Six Months Ended April 30 , 2020 vs.

Six Months Ended April 30 , 2019

Net sales of $22.8 million decreased by 6%, or $1.5 million, for the six months ended April 30, 2020 (the “fiscal 2020 six-month period”) compared to the six months ended April 30, 2019 (the “fiscal 2019 six-month period”).

The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $1.8 million, or 10%, to $15.8 million compared to $17.7 million in the fiscal 2019 six-month period.

Nine Months Ended July 31 , 2020 vs.

Nine Months Ended July 31 , 2019

Net sales were $32.3 million, a decrease of 19%, or $7.4 million, for the nine months ended July 31, 2020 (the “fiscal 2020 nine-month period”) compared to the nine months ended July 31, 2019 (the “fiscal 2019 nine-month period”).

The decrease in net sales is attributable to a decrease in net sales at the Custom Cabling segment, which decreased by $7.9 million, or 27%, to $21.8 million compared to $29.7 million in the fiscal 2019 nine-month period.

The decrease was primarily in our project-based business which resulted from the slowdown in carrier spending.

This decrease was partially offset by increased sales from the newly acquired Schrofftech and C Enterprises.

Net sales for the fiscal 2020 six-month period at the RF Connector segment increased by $0.4 million, or 5%, to $7.0 million compared to $6.6 million in the fiscal 2019 six-month period.

Gross profit for the fiscal 2020 six-month period decreased by $1.4 million to $5.8 million and gross margins decreased to 25.6% of sales from 29.8% of sales in the fiscal 2019 six-month period.

This decrease was partially offset by additional sales from the newly acquired Schrofftech and C Enterprises subsidiaries.

Net sales for the fiscal 2020 nine-month period at the RF Connector segment increased by $0.5 million, or 5%, to $10.6 million compared to $10.1 million in the fiscal 2019 nine-month period.

Gross profit for the fiscal 2020 nine-month period decreased by $2.9 million to $8.6 million, and gross margins decreased to 26.5% of sales from 28.9% of sales in the fiscal 2019 nine-month period.

Engineering expenses increased $0.4 million to $1.1 million for the fiscal 2020 six-month period compared to $0.7 million in the fiscal 2019 six-month period primarily due to the absorption of the engineering costs of the newly acquired Schrofftech, which we did not own in fiscal 2019, and a full six months of engineering costs at C Enterprises (whose expenses were only included in 2019 for the six-week period following the acquisition of this subsidiary on March 15, 2019).

Engineering expenses increased $0.6 million to $1.6 million for the fiscal 2020 nine-month period compared to $1.0 million in the fiscal 2019 nine-month period primarily due to the absorption of the engineering costs of the newly acquired Schrofftech (which we did not own in fiscal 2019) and a full nine months of engineering costs at C Enterprises (whose expenses were only included in 2019 following the acquisition of this subsidiary on March 15, 2019).

Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses increased $0.5 million to $4.9 million (22% of sales) compared to $4.4 million (18% of sales) in the six-month period last year largely due to the absorption of the additional selling and general expenses of the Schrofftech and C Enterprises subsidiaries.

Additionally, total selling and general expenses in the current quarter included $0.3 million of amortization expense, an increase of $0.2 million over last year as a result of the acquisition of Schrofftech, and $0.3 million in stock-based compensation expense, an increase of $0.1 million over last year due in part to a new officer hired by the Company.

Selling and general expenses increased $0.4 million to $7.4 million (23% of sales) compared to $7.0 million (18% of sales) in the nine-month period last year largely due to the additional selling and general expenses of the recently acquired Schrofftech and C Enterprises subsidiaries.

Additionally, total selling and general expenses in the current nine-month period included (i) $0.5 million of amortization expense, an increase of $0.3 million over last year as a result of the acquisition of Schrofftech, (ii) $0.4 million in stock-based compensation expense, an increase of $0.1 million over last year due in part to option grants to new hires and the expense related to accelerated vesting of options under a departing officer’s severance agreement totaling approximately $58,000, and (iii) the severance obligation payable upon this officer’s termination of $93,500.

These costs were partially offset with a $0.7 million valuation decrease in the Schrofftech earn-out liability.

For the fiscal 2020 six-month period, pretax income (loss) for the Custom Cabling segment and the RF Connector segment was $(1.2) million and $1.0 million, respectively, as compared to $1.6 million and $0.5 million for the comparable six-month period last year.

The pretax loss at the Custom Cabling segment in the six-month period of fiscal 2020 was primarily due to the decrease in project-based businesses resulting from the slowdown in carrier spending.

The provision (benefit) for income taxes was (7%) and 22% of income before income taxes for the six months ended April 30, 2020 and 2019, respectively.

The change in the effective tax rate from the fiscal 2019 six-month period to fiscal 2020 six-month period was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to the Company’s forecasted book income in each period.

For the fiscal 2020 six-month period, net loss was $0.2 million and fully diluted loss per share was $0.02 per share as compared to a net income of $1.7 million and fully diluted earnings per share of $0.17 per share for the fiscal 2019 six-month period.

For the fiscal 2020 six-month period, the diluted weighted average shares outstanding was 9,633,935 as compared to 9,837,718 for the fiscal 2019 six-month period.

For the fiscal 2020 nine-month period, pretax (loss) income for the Custom Cabling segment and the RF Connector segment was $(2.2) million and $1.8 million, respectively, as compared to $2.7 million and $0.7 million for the comparable nine-month period last year.

The pretax loss at the Custom Cabling segment in the nine-month period of fiscal 2020 was primarily due to the decrease in project-based businesses resulting from the slowdown in carrier spending.

The provision or benefit for income taxes was 38% and 22% of (loss) income before income taxes for the nine months ended July 31, 2020 and 2019, respectively.

The change in the effective tax rate from the fiscal 2019 nine-month period to the fiscal 2020 nine-month period was primarily driven by the disproportionate impact of various permanent book-tax differences with respect to our forecasted book income or loss in each period.

For the fiscal 2020 nine-month period, net loss was $0.2 million and fully diluted loss per share was $0.02 per share as compared to a net income of $2.7 million and fully diluted earnings per share of $0.28 per share for the fiscal 2019 nine-month period.

For the fiscal 2020 nine-month period, the diluted weighted average shares outstanding was 9,661,054 as compared to 9,849,889 for the fiscal 2019 nine-month period.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis