RP Optical published its second-quarter report. Two lines in it are unusual, and both in a favourable direction.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
A note before the figures: the company reports in dollars, not shekels. All amounts here are denominated in dollars.
The Quarter
| $ millions | The quarter | Share of revenue |
|---|---|---|
| Revenue | 30.7 | |
| Gross profit | 12.7 | 41.4% |
| Operating profit | 5.0 | 16.3% |
| Pre-tax profit | 7.6 | 24.7% |
| Net profit | 6.9 | 22.6% |
| Basic earnings per share | $0.09 | |
| Balance sheet total | 103.4 | |
| Shareholders' equity | 81.1 |
The First: Pre-Tax Profit Exceeds Operating Profit
$5.0 million of operating profit, and $7.6 million before tax. $2.6 million was added.
And that is the opposite direction to most of what we read today.
Leverage of 1.3 to one - $103.4 million of assets on equity of $81.1 million - means the company is barely leveraged.
And in that position, instead of paying interest it receives it - on cash and on investments. And at a company that reports in dollars and sells into international markets, this item can also include exchange differences.
The structured filing does not detail the composition of the item, so I do not assert the share of each component. What is clear: an addition of $2.6 million on operating profit of $5.0 million is more than half of it - so it is not marginal to the outcome.
And that also means the quarter's net profit depends on a line that is not operating. What describes the business is the $5.0 million, not the $6.9 million.
And the Second: A Tax Rate of 8.6%
$7.6 million before tax, $6.9 million after. Tax took $0.65 million.
That is less than half Israel's corporate rate of 23%.
The structured filing does not detail the tax reconciliation, so I do not assert its source. A low rate at an Israeli industrial company frequently arises from benefits under the capital investment encouragement law, which apply to export-oriented plants - but that is a hypothesis, not a finding from the accounts.
What can be said: had the rate been 23%, net profit would have been about $5.8 million rather than 6.9 - a gap of roughly $1.1 million in the quarter.
The Margins
| Gross margin | 41.4% |
| Operating margin | 16.3% |
| Survival | about 39% |
A gross margin of 41.4% is high for industry, and it is characteristic of high-precision manufacturing: the product is sold on performance rather than by weight, and competition is limited to manufacturers with comparable capability.
And survival of 39% points to a structure heavy in development and head office relative to turnover - which is what you would expect at a company selling engineered-to-order products.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
What I take from this report is that two figures in it turn a reasonable quarter into a good one - and neither is operational.
Operating profit is $5.0 million, 16.3% of revenue. That is the quarter. And from there, a financial addition of $2.6 million and a tax rate of 8.6% brought the bottom line to $6.9 million - 22.6% of revenue.
Both of those components are entirely legitimate and belong in profit. But both may not recur: exchange differences reverse, interest rates fall, and a tax benefit depends on a status granted for a period.
So the figure I hold for comparing across quarters is operating profit, and that is the one I will follow.
And what I would look for in the full accounts is the composition of the item below the operating line - how much is interest and how much is exchange differences. At a dollar-reporting company selling around the world, that distinction determines how repeatable the result is.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
