Optical Cable Corporation (OCC) — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2022; figures are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment, and wireless-carrier markets.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $17.38 million | $15.63 million | $49.02 million | $43.25 million |
| Gross profit / margin | $4.81 million / 27.7% | $4.09 million / 26.2% | $13.89 million / 28.3% | $11.22 million / 25.9% |
| SG&A | $4.95 million | $4.53 million | $14.77 million | $13.43 million |
| Operating loss | $166,000 | $457,000 | $941,000 | $2.20 million |
| Net income (loss) | ($372,000) | $5.37 million | ($1.54 million) | $6.62 million |
| Diluted EPS | ($0.05) | $0.71 | ($0.20) | $0.88 |
Q3 sales rose 11.2% year over year and gross profit rose 17.6%; nine-month sales increased 13.3%. Q3 U.S. sales grew 13.5% while international sales were flat. For the nine months, U.S. sales rose 18.8% and international sales declined 10.0%. SG&A growth reflected higher sales-related compensation, hiring, travel, shipping, and marketing costs. Gross-margin improvement reflected higher sales and operating leverage, partly offset by rising material and labor costs.
Cash, liquidity, and debt
- Nine-month operating cash flow was a use of $1.72 million, versus a use of $210,000 in the prior-year period. Inventory increased $2.38 million and receivables increased $1.82 million, partly offset by receipt of $2.18 million in other receivables, including the remaining ERTC receivable.
- Investing cash outflow was $216,000; financing cash inflow was $1.99 million. Cash rose $60,000 from October 31, 2021 to $192,000.
- At July 31, 2022, working capital was $22.3 million and the current ratio was 4.2:1, compared with $21.4 million and 4.5:1 at fiscal year-end. Inventory was $18.69 million, up $2.38 million.
- Revolver borrowings were $5.91 million, up from $3.47 million; $4.9 million of availability remained. The July 2022 amendment extended the facility term to July 24, 2025 and reduced the availability block to $1.15 million. The revolver rate was 7.0% at July 31.
- Real-estate term debt totaled $4.61 million, bearing fixed interest at 3.95%; final payments are due May 1, 2024. Management said cash, operating cash flow, and existing facilities should fund operations for at least 12 months.
Outlook, risks, and unusual items
- Management reported robust demand and a sales backlog/forward load above $15 million, roughly three to five times typical levels. It expected strong demand through the rest of FY2022, but provided no numerical revenue or earnings guidance.
- Supply availability, longer lead times, inflation, and difficulty recruiting and training production workers constrained output and sales despite demand. OCC had implemented prospective price increases; management expected these challenges to continue.
- Management identified COVID-19 effects, macroeconomic and geopolitical risks, raw-material and labor cost pressures, interest rates, customer/order concentration, seasonality, and execution and financing risks as factors that could affect results.
- Prior-year earnings included a $5.0 million PPP-loan extinguishment gain and $4.34 million of ERTC income for the nine-month comparison period ($965,000 in Q3). These items did not recur in FY2022; OCC received the remaining $2.16 million ERTC receivable in Q3 FY2022. This explains much of the sharp year-over-year change in net income.
- One national distributor accounted for 15.8% of Q3 sales and 16.7% of nine-month sales. Management said ordinary-course legal matters were not expected to materially affect financial condition, results, or liquidity. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Whether backlog converts to shipped sales as labor and supply constraints ease, and whether pricing offsets continuing cost inflation.
- Cash conversion and working-capital needs, particularly inventory and receivables, given negative operating cash flow and low cash on hand.
- Revolver availability, interest costs, and compliance with lender requirements as borrowings rise.
- Customer concentration and the durability of demand across enterprise, specialty, and wireless-carrier markets.
- Tax-asset valuation allowance assumptions and the distinction between prior-period PPP/ERTC income and recurring operating performance.