Optical Cable Corporation (OCC) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2022. Financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment, and wireless-carrier markets.
Financial performance
| Metric | Three months ended April 30, 2022 | Six months ended April 30, 2022 |
|---|---|---|
| Net sales | $17.2 million, up 9.3% year over year | $31.6 million, up 14.6% |
| Gross profit / margin | $5.0 million / 29.3%; prior-year margin 30.6% | $9.1 million / 28.7%; prior-year margin 25.8% |
| SG&A | $5.0 million, up 9.7% | $9.8 million, up 10.3% |
| Operating income (loss) | ($21,000) | ($774,000) |
| Net income (loss) | ($228,000), or ($0.03) per share | ($1.16 million), or ($0.16) per share |
| Cash from operations | Not presented separately for the quarter | ($3.03 million), versus ($392,000) in the prior-year period |
Quarterly sales increased sequentially 19.1% from Q1. Six-month gross margin improved year over year, reflecting operating leverage and prior operational actions, but Q2 margin fell as inflation raised raw-material costs on previously accepted orders. SG&A growth reflected sales personnel costs, commissions, labor compensation, travel, shipping, and marketing.
Financial position and liquidity
- At April 30, cash was $239,000; working capital was $23.6 million and the current ratio was 3.8:1, down from 4.5:1 at October 31, 2021.
- Total assets were $41.8 million and total liabilities were $20.6 million. Inventory was $18.6 million, up $2.3 million since fiscal year-end; net trade receivables were $10.6 million, up $2.2 million.
- Revolver borrowings were $7.0 million, with $3.3 million of available credit. Term debt was $4.7 million; the real-estate loans bear fixed interest at 3.95%. The revolver rate was 5.0% at quarter-end and its stated termination date is July 24, 2023.
- Six-month investing cash outflow was $112,000; financing provided $3.25 million, mainly from net revolver borrowings. Management stated cash, operating cash flows, and credit facilities should fund operations for at least the next 12 months.
Comparative changes and unusual items
- Prior-year Q2 and first-half results included Employee Retention Tax Credit income of approximately $3.4 million. Its nonrecurrence was the principal reason net results shifted from prior-year profit to loss; it is not a recurring operating revenue source.
- The remaining $2.16 million ERTC receivable was recorded at April 30 and received in May 2022.
- U.S. sales rose 19.5% in Q2 and 22.0% in the first half; sales outside the U.S. declined 28.3% and 15.0%, respectively. Management attributed the international comparison partly to certain overseas end-user projects being sold to U.S. customers for value-added processing.
- One national distributor represented 17.0% of Q2 sales and 17.1% of first-half sales.
Outlook, risks, and other disclosures
- Management reported robust demand and backlog/forward load above typical levels, and expected to benefit from improving markets during the rest of fiscal 2022. Backlog was not quantified, and no formal earnings or revenue guidance was provided.
- Supply availability, longer lead times, raw-material inflation, and difficulty recruiting workers constrained production and shipments. OCC said labor constraints showed signs of easing and that it had implemented price increases on new orders, but warned these challenges would continue.
- Management cited COVID-19-related uncertainty, macroeconomic and geopolitical risks, inflation, rising interest rates, customer/project timing, product mix, and sales concentration as factors that could affect results. OCC typically expects 48% of annual sales in the first half and 52% in the second half, but said this pattern is not reliably predictive amid other volatility.
- Fiscal 2022 capital spending was budgeted at $1.5 million; there were no material capital-expenditure commitments at quarter-end. Ordinary-course legal and regulatory matters were not expected by management to materially affect financial position, results, or liquidity.
- The company reported effective disclosure controls as of April 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated backlog converts to shipments and sales despite labor, material, and lead-time constraints.
- Whether pricing actions offset continued input-cost inflation and support gross margins.
- Operating cash use and working-capital needs, particularly inventory and receivables, as sales grow.
- Revolver availability, borrowing terms, and refinancing or extension arrangements ahead of the July 2023 termination date.
- Receipt of the ERTC receivable after quarter-end and the ongoing contribution of the concentrated national distributor.