Optical Cable Corporation — Q1 FY2020 Form 10-Q
Business context and period: Unaudited results for the three months ended January 31, 2020, compared with the three months ended January 31, 2019. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, wireless-carrier, harsh-environment and specialty markets.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 / comparison |
|---|---|---|
| Net sales | $12.9 million | $16.8 million; down 23.1% |
| Gross profit / margin | $2.4 million / 18.7% | $3.6 million / 21.3% |
| SG&A | $4.8 million | $6.8 million; down 28.8% |
| Operating loss | $2.45 million | $3.22 million |
| Net loss / diluted loss per share | $2.59 million / $0.35 | $3.31 million / $0.44 |
| Operating cash flow | $544,000 provided | $1.15 million used |
At January 31, 2020, cash was $694,000, working capital was $13.2 million and the current ratio was 2.1 to 1.0. Total assets were $36.7 million; shareholders’ equity was $18.7 million. Borrowings comprised $5.65 million under the revolving facility and $5.59 million of real-estate term debt. The $5.7 million revolver had $850,000 of availability and was due June 30, 2020.
Material changes and management commentary
- Sales declined mainly because a large domestic customer’s orders were substantially lower: sales to that customer fell by $2.3 million year over year, following approximately $2.8 million of large orders in Q1 FY2019. Enterprise and wireless-carrier sales fell, partly offset by growth in other specialty markets. Sales declined in both the U.S. and international markets.
- Gross margin contracted as lower sales left fixed manufacturing costs spread over less volume, despite cost-reduction and efficiency actions. Management said savings from prior-year employee-cost reductions were being realized and expected more benefit as sales increased.
- SG&A fell by $2.0 million, primarily reflecting lower employee-related costs, including lower share-based compensation, and reductions in other expenses. Despite the lower SG&A, the company remained loss-making.
- Operating cash flow improved, helped by $3.6 million of receivables collections and a $915,000 inventory reduction; this was partly offset by lower payables and accrued expenses, including compensation, of about $1.7 million. Capital expenditures were $47,000.
Debt, outlook and risks
- At quarter-end, OCC did not meet the lender’s current-ratio covenant (2.1 versus a 3.0 minimum) or liabilities-to-tangible-net-worth covenant (1.0 versus a 0.95 maximum). The revolver’s June 30, 2020 maturity caused its balance to be classified as current.
- A March 10, 2020 loan amendment, after quarter-end, waived those two covenants for the January 31 and April 30, 2020 quarters. OCC reaffirmed a $200,000 term-loan principal reduction due by April 15 and its plan to seek refinancing, with a financing commitment targeted by May 1 and closing by June 30. The revolver rate was prime plus 0.50% (5.25% at quarter-end).
- Management believed operating cash flow, cash on hand and existing or additional financing would fund operations for at least twelve months, and believed alternative revolver financing could be secured by June 30. These expectations depend on refinancing and continued access to financing; no formal sales or earnings guidance was provided.
- Management cited customer/order concentration, project timing, seasonality, market and product mix, competition, raw-material costs, supplier dependence, and financing and covenant compliance among risks. The filing also identifies epidemic or pandemic disease, including COVID-19, as a potential risk; it does not quantify a COVID-19 impact on this quarter’s results.
- Ordinary-course claims and regulatory matters were not expected by management to materially affect the company. OCC adopted lease accounting in the quarter, recognizing operating-lease right-of-use assets and liabilities; the adoption had no opening retained-earnings adjustment.
Important facts for investors to verify
- Whether OCC completed the required term-loan paydown and obtained refinancing for the revolver before its June 30, 2020 maturity.
- How the covenant waivers and refinancing affected liquidity, borrowing costs, collateral and subsequent covenant compliance.
- Whether sales recovered after the unusually low quarter, particularly in enterprise and wireless-carrier markets, and whether customer concentration remains elevated.
- Whether improved operating cash flow is sustainable, given that it benefited materially from working-capital reductions while the company continued to report a net loss.