Optical Cable Corporation (OCC) — Form 10-Q Summary
Reporting period: Quarter and nine months ended July 31, 2019. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets. All amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $17.4 million | $23.1 million | $53.1 million | $67.6 million |
| Gross profit | $4.5 million | $7.0 million | $13.4 million | $21.2 million |
| Gross margin | 25.9% | 30.4% | 25.2% | 31.4% |
| Operating income (loss) | $(0.9) million | $0.7 million | $(4.6) million | $1.9 million |
| Net income (loss) | $(1.1) million | $0.4 million | $(5.0) million | $1.4 million |
| Diluted EPS | $(0.15) | $0.06 | $(0.68) | $0.19 |
- Cash flow: Nine-month operating cash flow was $(47,000), versus $1.0 million provided in the prior-year period. Investing cash outflow was $541,000; financing cash inflow was $1.5 million. Cash increased to $1.1 million from $177,000 at October 31, 2018.
- Liquidity: Working capital was $16.2 million, down from $24.0 million. The current ratio was 2.1:1, versus 4.4:1 at October 31, 2018.
- Debt: At July 31, 2019, borrowings included $5.65 million on the revolving facility and $6.22 million of term debt, approximately $11.9 million combined. Revolver availability was $1.3 million. Term loans carry a 3.95% fixed rate; the revolver rate was 4.90% at quarter-end.
- Balance sheet: Total assets were $41.5 million, total liabilities $19.7 million and shareholders’ equity $21.9 million. Inventories rose $1.3 million to $18.8 million from October 31, 2018.
Changes and management commentary
- Q3 sales fell 24.9% year over year, and nine-month sales fell 21.4%. Management attributed most of the decrease to large orders from one domestic customer in 2018 that did not recur at comparable levels: sales to that customer declined $7.2 million in Q3 and $17.3 million for the nine-month period. Excluding this customer, sales to other customers increased 9.5% in Q3 and 6.5% over nine months.
- Gross margin declined in both comparisons. Management cited product mix, lower sales spreading fixed manufacturing costs over less volume, increased employee-related and other costs, and manufacturing throughput constraints at the Roanoke facility. Those constraints followed workforce expansion, training and process changes.
- OCC reported ongoing cost-control and operational-efficiency efforts. Actions to reduce employee-related cost of goods sold were expected to yield annual savings exceeding $700,000, with benefits not expected to be fully realized until after Q4 fiscal 2019.
- SG&A declined 14.9% in Q3 and 7.0% over nine months, but rose as a share of sales to 31.2% and 33.9%, respectively, as revenue contracted.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it believes cash, operating cash flow and available or additional financing will be adequate to fund operations for at least the next 12 months, while also noting it is working to extend or renew bank financing and considering other financing sources.
- Covenant and financing risk: The revolver matures June 30, 2020. Based on results through July 31, management said OCC may fail its annual minimum fixed-charge-coverage covenant of 1.25:1 at October 31, 2019. The current-ratio covenant ordinarily requires at least 3.0:1; the lender suspended that covenant for the July quarter. OCC reported a 0.93:1 liabilities-to-tangible-net-worth ratio, within its 0.95:1 maximum.
- In a September 11, 2019 post-quarter amendment, OCC agreed to reduce total lending availability from $7.0 million to $6.5 million and repay $500,000 against the term loans by November 29, 2019. The revolver rate changed from LIBOR plus 2.50% to prime plus 0.25%, effective September 10. The lender suspended the July-quarter current-ratio covenant.
- Sales are exposed to order timing, customer concentration, seasonality, product mix, competition, raw-material and transportation costs, and economic conditions in customer markets. One customer represented 15.1% of Q3 sales; two customers represented 14.5% and 14.1% of nine-month sales.
- OCC had a full valuation allowance against net deferred tax assets; tax expense or benefits may therefore be unusually low. Management said ordinary-course claims and legal or regulatory matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective as of July 31, 2019.
Investor verification priorities
- Track fourth-quarter sales, gross margin and progress resolving Roanoke throughput constraints; assess whether the announced cost savings are achieved.
- Verify repayment of the $500,000 term-loan amount by November 29, 2019, revised revolver availability and terms, and financing renewal ahead of the June 2020 maturity.
- Monitor year-end compliance with the fixed-charge-coverage covenant and any waivers or amendments, given the company’s stated possibility of noncompliance.
- Assess working-capital conversion, inventory levels, operating cash flow and customer concentration alongside reported earnings.
- Review the full-year outcome against management’s 12-month liquidity assessment and the stated financing alternatives.