Optical Cable Corporation — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020; balance-sheet comparisons are to October 31, 2019. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets. Results are unaudited.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $13.6 million | $17.4 million | $41.4 million | $53.1 million |
| Gross profit | $3.5 million | $4.5 million | $9.9 million | $13.4 million |
| Gross margin | 25.5% | 25.9% | 23.9% | 25.2% |
| SG&A expense | $4.6 million | $5.4 million | $14.9 million | $18.0 million |
| Net loss | $1.4 million | $1.1 million | $5.7 million | $5.0 million |
| Loss per share, basic and diluted | $0.20 | $0.15 | $0.78 | $0.68 |
Q3 sales fell 21.5% year over year and 8.2% sequentially. Nine-month sales declined 22.0%. Lower sales reduced gross profit and left fixed manufacturing costs spread over fewer units; SG&A reductions partly offset the impact. Q3 SG&A was 33.4% of sales versus 31.2% a year earlier; for nine months it was 36.1% versus 33.9%.
Cash flow: Net cash used in operating activities was $2.4 million for the nine months, compared with $47,000 used in the prior-year period. Investing activities used $131,000; financing activities provided $3.0 million, including PPP proceeds. Cash increased $461,000 to $999,000.
Liquidity and debt: Working capital was $17.7 million and the current ratio was 3.3:1 at July 31, versus $15.8 million and 2.2:1 at October 31, 2019. Total liabilities were $21.3 million; shareholders’ equity was $15.6 million. Debt included a $5.0 million PPP loan, $4.6 million outstanding on the revolving facility and $5.2 million of real-estate term loans. The company reported $2.2 million of revolver availability. Real-estate loans bear 3.95% interest; the revolver rate was 4.75% at quarter-end.
Material changes and unusual items
- OCC received a $4.981 million unsecured PPP loan in April at 1% interest. Some or all may be forgiven if requirements are met; if not forgiven, repayment terms require monthly payments beginning seven months after origination, with remaining amounts due in April 2022.
- On July 24, OCC replaced its Pinnacle Bank revolver with a North Mill facility, with an $18 million maximum commitment, subject to borrowing-base limits. It bears interest at 1.5% above prime, with a 4.75% floor, and is secured by substantially all company assets, including intellectual property. Outstanding borrowings were $4.6 million at July 31.
- The allowance for doubtful accounts rose to $531,000 from $100,000 at October 31; nine-month bad-debt expense was $432,000, reflecting concerns about collecting certain customer balances.
- Nine-month sales were affected by a large customer’s nonrecurring orders: sales to that customer fell $5.6 million year over year. That customer accounted for 13.7% of nine-month FY2020 sales.
- OCC adopted lease accounting in November 2019. At July 31, it reported $1.35 million of operating lease right-of-use assets and $1.36 million of lease liabilities.
Outlook, commentary and risks
Management said COVID-19 negatively affected revenues, production volumes, operations, access to capital and customer cash receipts. Facilities continued operating at reduced production levels. Management expected fourth-quarter sales to be negatively affected and said impacts could continue into FY2021; timing and severity remained uncertain. The filing provides no numerical earnings or revenue guidance.
Management said future cash flow from operations, cash on hand and existing credit facilities should fund operations for at least the next 12 months. This expectation is exposed to continuing losses, operating cash use, market uncertainty and financing needs. The company also cited order timing and volatility, customer and market concentration, competition, raw-material costs, supply-chain dependencies and potential credit losses as risks. Ordinary-course claims and regulatory matters were not expected by management to materially affect financial position, results or liquidity. The stock repurchase plan remained suspended.
For the first nine months, the tax provision was $15,000 despite the pretax loss; OCC said it maintained a full valuation allowance against net deferred tax assets. Management concluded disclosure controls were effective as of July 31, 2020.
Important facts for investors to verify
- Whether the PPP loan qualifies for forgiveness, and the resulting repayment obligation if it does not.
- North Mill borrowing-base availability, collateral terms, interest costs and compliance with applicable loan requirements.
- Collection of receivables and whether the increased doubtful-account allowance adequately reflects customer credit risk.
- How quickly sales recover from COVID-19 disruption and the loss of the prior-year large customer orders; verify ongoing customer concentration.
- Cash generation and liquidity if operating losses and negative operating cash flow continue beyond management’s stated 12-month funding expectation.