Optical Cable Corporation (OCC) — Form 10-Q Summary
Reporting period: Third quarter and nine months ended July 31, 2023. Comparisons are with the corresponding 2022 periods; balance-sheet comparisons are with October 31, 2022. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment, and wireless-carrier markets. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended July 31, 2023 | Nine months ended July 31, 2023 |
|---|---|---|
| Net sales | $16.94 million; down 2.5% year over year | $54.84 million; up 11.9% |
| Gross profit / margin | $5.12 million / 30.2%, versus $4.81 million / 27.7% | $18.42 million / 33.6%, versus $13.89 million / 28.3% |
| Operating income (loss) | $138,000, versus $(166,000) | $2.28 million, versus $(941,000) |
| Net income (loss) / diluted EPS | $101,000 / $0.01, versus $(372,000) / $(0.05) | $3.33 million / $0.42, versus $(1.54) million / $(0.20) |
| Operating cash flow | $(929,000) for nine months, compared with $(1.72) million |
- Cash and liquidity: At July 31, cash was $193,000 and restricted cash was $1.52 million. Working capital excluding restricted cash was $23.2 million; the comparable current ratio was 3.0, down from 4.2 at October 31, 2022.
- Debt: Revolver borrowings were $7.3 million, with $3.9 million available; the stated interest rate was 10.0%. Real-estate term loans totaled $4.28 million at 3.95%, with final payments due May 1, 2024. Total bank debt was approximately $11.6 million. OCC says the revolver matures July 24, 2025.
- Cash flow and investment: Investing activities provided $1.58 million, primarily from insurance proceeds, while financing activities provided $845,000. Capital purchases and deposits were $371,000. Inventory increased $5.51 million during the nine months.
- Balance sheet: Total assets were $45.6 million, liabilities $19.7 million, and shareholders’ equity $25.8 million. Inventory was $24.9 million.
Changes versus the prior comparable period
- Third-quarter sales declined modestly, primarily reflecting lower enterprise-market sales, partly offset by specialty-market growth. U.S. sales decreased 3.1%; sales outside the U.S. were approximately flat for the quarter.
- For the nine months, sales rose in specialty markets and internationally, partly offset by lower enterprise sales. U.S. sales grew 7.3% and non-U.S. sales grew 37.7%.
- Gross margin improved in both periods. Management attributed the improvement to production efficiencies, a more fully trained workforce, higher production throughput and, for the nine-month period, operating leverage and improved pricing.
- Nine-month SG&A increased 8.8% to $16.1 million, including higher sales personnel costs, shipping, travel and marketing. As a share of sales, SG&A declined to 29.3% from 30.1%.
- Operating cash use narrowed year over year, but remained negative, in part because of inventory investment. Term debt became classified as current as the May 2024 maturity approached; current installments rose to $4.28 million.
Outlook, commentary, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management believes cash on hand, operating cash flow and existing credit facilities will be adequate to fund operations for at least the next 12 months.
- Demand and backlog: Management reported softening in some enterprise and wireless-carrier markets, but positive indicators in certain other markets. Backlog/forward load was approximately $6.8 million at quarter-end, down from approximately $8.0 million at the prior quarter-end and more than $12.0 million at October 31, 2022.
- Cyber incident: A June 2023 cyber incident caused a brief manufacturing shutdown and reduced production and shipping days by approximately seven. Management reported that operations returned to normal functionality; the incident negatively affected quarterly sales.
- Insurance gain: Water damage from a burst sprinkler pipe at an Asheville office building led to $2.0 million of net insurance proceeds recognized as a gain in the first nine months, including $256,000 in the quarter. The damaged office building is separate from the manufacturing building. Some proceeds, $1.52 million, remained restricted in escrow at quarter-end; future restoration costs could produce offsetting losses, although management does not expect them to exceed insurance proceeds.
- Key risks: Results may be affected by market and customer order volatility, customer concentration (one national distributor accounted for 16.3% of nine-month sales), product mix, raw-material and labor costs, supply constraints, competition, inflation and interest rates, and the ability to maintain financing and comply with lender covenants. Management also cites seasonality, though it said the usual pattern was not evident in fiscal 2023.
- Other matters: Management believes ordinary-course claims and legal matters will not materially affect financial position, results or liquidity. Disclosure controls were assessed as effective as of July 31, 2023; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales and backlog stabilize after the decline in backlog and softening in certain markets, and how much the cyber-related disruption affected results.
- Whether gross-margin gains persist as product mix, volumes and production efficiency change.
- How much of nine-month earnings depended on the $1.95 million insurance gain, and whether subsequent restoration costs create offsetting charges.
- Inventory conversion, operating cash generation, and the availability of revolver borrowing under its borrowing-base terms.
- Plans and financing for the $4.28 million real-estate term-loan payments due May 2024, as well as the cost of the 10.0% revolver borrowing.
- Updates on the cyber incident, insurance escrow releases, and any material legal, regulatory or lender-covenant developments.