Business activities and summary of significant accounting policies (Policies)

12 Months Ended

Oct. 31, 2013

Accounting Policies [Abstract]

Business activities

Business activities

The Company’s business is comprised of the design, manufacture and/or sale of communications equipment primarily to the radio and other professional communications related industries. As of October 31, 2013, the Company conducted its operations through four related business divisions: (i) Connector and Cable Assembly Division is engaged in the design, manufacture and distribution of coaxial connectors and cable assemblies used primarily in radio and other professional communications applications; (ii) Aviel Division is engaged in the design, manufacture and sales of radio frequency, microwave and specialized connectors and connector assemblies for aerospace, original electronics manufacturers and military electronics applications; (iii) Bioconnect Division is engaged in the design, manufacture and sales of cable interconnects for medical monitoring applications; and (iv) the Cables Unlimited Division manufactures custom and standard cable assemblies, adapters, and electromechanical wiring harnesses for communication, computer, LAN, automotive and medical equipment.

During 2013, the Company sold and discontinued its operations of the RF Neulink and RadioMobile divisions (see Note 2). In addition, effective November 1, 2013, the Oddcables Division was integrated with the Connector and Cable Division.

Use of estimates

Use of estimates 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from those estimates.

Principles of consolidation

Principles of consolidation

The accompanying consolidated financial statements include the accounts of RF Industries, Ltd. and its wholly owned subsidiary, Cables Unlimited, Inc. (“Cables Unlimited”), collectively (the “Company”). K&K Unlimited (“K&K”), a variable interest entity (“VIE”) of the Company was deconsolidated in the first quarter of 2012. All intercompany balances and transactions have been eliminated in consolidation.

Cash equivalents

Cash equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Revenue recognition

Revenue recognition

Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. The Company recognizes revenue from product sales after purchase orders are received which contain a fixed price and the products are shipped. Most of the Company’s products are sold to continuing customers with established credit histories.

Inventories

Inventories

Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or market. Cost has been determined using the weighted average cost method.

Property and equipment

Property and equipment

Equipment, tooling and furniture are recorded at cost and depreciated over their estimated useful lives (generally 3 to 5 years) using the straight-line method. Expenditures for repairs and maintenance are charged to operations in the period incurred.

Variable interest entity

Variable interest entity

Management analyzes if the Company has any variable interests in VIE’s.  This analysis includes a qualitative review based on an evaluation of the design of the entity, its organizational structure, including decision making ability and financial agreements, as well as a quantitative review.  Accounting principles generally accepted in the United States of America require a reporting entity to consolidate a VIE when the reporting entity has a variable interest that provides it with a controlling financial interest in the VIE.  The entity that consolidates a VIE is referred to as the primary beneficiary of the VIE. See Note 11 for further discussion.

Goodwill

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is not amortized, but is subject to impairment analysis at least once annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. At October 31, 2013, the Company performed a qualitative assessment of factors to determine whether it was necessary to perform impairment testing. Based on the results of the work performed, the Company concluded that no impairment loss was warranted at October 31, 2013. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance and other relevant events, management expertise and stability at key positions. Additional impairment analyses at future dates may be performed to determine if indicators of impairment are present, and if so, such amount will be determined and the associated charge will be recorded to the Consolidated Statement of Income.  

On June 15, 2011, the Company completed its acquisition of Cables Unlimited. Goodwill related to this acquisition is included within the Cables Unlimited reporting unit. As of October 31, 2013, the goodwill balance related solely to the Cables Unlimited acquisition. No goodwill impairment occurred in 2013 or 2012.

Long-lived assets

Long-lived assets

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the undiscounted cash flows expected to be generated by an asset (or group of assets) is less than its carrying amount. Any required impairment loss is measured as the amount by which the assets carrying value exceeds its fair value, and is recorded as a reduction in the carrying value of the related asset and a charge to operations.

Intangible assets

Intangible assets

Intangible assets consist of the following as of October 31 (in thousands): 

	2013		2012
Amortizable intangible assets:
Non-compete agreements (estimated life 5 years)	$	200	$	200
Accumulated amortization		(95)		(55)
		105		145
Customer relationships (estimated life 9.6 years)		1,730		1,730
Accumulated amortization		(428)		(248)
		1,302		1,482
Totals	$	1,407	$	1,627
Non-amortizable intangible assets:
Trademarks	$	410	$	410

Amortization expense for the years ended October 31, 2013 and 2012 was $220,000 and $239,000, respectively.

Estimated amortization expense related to finite lived intangible assets are as follows (in thousands):

Year ending
October 31,	Amount
2014	$	220
2015		220
2016		206
2017		180
2018		180
Thereafter		401
Total	$	1,407

Advertising

Advertising

The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations were approximately $195,000 and $242,000 in 2013 and 2012, respectively.

Research and development

Research and development

Research and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering activities, which consists of the design and development of new products for specific customers, as well as the design and engineering of new or redesigned products for the industry in general. During the years ended October 31, 2013 and 2012, the Company recognized $1.4 million and $1.1 million in engineering expenses, respectively.

Income taxes

Income taxes

The Company accounts for income taxes under the asset and liability method, based on the income tax laws and rates in the jurisdictions in which operations are conducted and income is earned. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Developing the provision for income taxes requires significant judgment and expertise in federal, international and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Management’s judgments and tax strategies are subject to audit by various taxing authorities.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Stock options

Stock options

For stock option grants to employees, the Company recognizes compensation expense based on the estimated fair value of the options at the date of grant. Stock-based employee compensation expense is recognized on a straight-line basis over the requisite service period. The Company issues previously unissued common shares upon the exercise of stock options.

For the fiscal years ended October 31, 2013 and 2012, charges related to stock-based compensation amounted to approximately $232,000 and $264,000, respectively.  For the fiscal years ended October 31, 2013 and 2012, stock-based compensation classified in cost of sales amounted to $58,000 and $53,000 and stock-based compensation classified in selling, general and engineering expense amounted to $174,000 and $211,000, respectively.

Earnings per share

Earnings per share

Basic earnings per share is calculated by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. The calculation of diluted earnings per share is similar to that of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally those issuable upon the exercise of stock options, were issued and the treasury stock method had been applied during the period. The greatest number of shares potentially issuable by the Company upon the exercise of stock options in any period for the years ended October 31, 2013 and 2012, that were not included in the computation because they were anti-dilutive, totaled 21,177 and 755,568, respectively.

The following table summarizes the computation of basic and diluted earnings per share:

	2013		2012
Numerators:
Consolidated net income (A)	$	3,828,000	$	2,612,000
Denominators:
Weighted average shares outstanding for basic earnings per share (B)		7,600,029		6,908,890
Add effects of potentially dilutive securities - assumed exercise of stock options		855,602		771,853
Weighted average shares outstanding for diluted earnings per share (C)		8,455,631		7,680,743
Basic earnings per share (A)/(B)	$	0.50	$	0.38
Diluted earnings per share (A)/(C)	$	0.46	$	0.34

Reclassification

Reclassification

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported consolidated net income.

Recent accounting standards

Recent accounting standards

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company intends to adopt this guidance at the beginning of its first quarter of fiscal year 2015, and is currently evaluating the impact on its consolidated financial statements and disclosures.