Optical Cable Corporation — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016; balance-sheet comparisons are against October 31, 2015. The company designs and manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended April 30, 2016 | Six months ended April 30, 2016 |
|---|---|---|
| Net sales | $16.34 million; down 12.5% year over year | $30.39 million; down 15.7% |
| Gross profit / margin | $4.55 million / 27.9%, versus $5.67 million / 30.4% | $8.05 million / 26.5%, versus $11.05 million / 30.7% |
| Operating loss | $856,000 | $2.46 million |
| Net loss attributable to OCC | $983,000; $0.15 per share | $2.73 million; $0.43 per share |
| Operating cash flow | Six-month period: $598,000, versus $350,000 in the prior-year period |
At April 30, cash was $661,000; working capital was $20.8 million and the current ratio was 4.4:1. Total assets were $42.2 million. Debt comprised $6.0 million outstanding on the revolving facility and $7.09 million of real-estate term loans, or approximately $13.09 million total debt. Cash declined $422,000 during the six months. Investing cash outflow was $556,000, including $507,000 of property and equipment purchases and $54,000 of intangible-asset investment. No dividends were declared in the periods presented, though $141,000 of previously declared dividends was paid in the first half.
Changes and management commentary
- Second-quarter sales improved 16.3% sequentially from $14.0 million in Q1, but remained below the prior-year quarter. Sales declined in both enterprise and specialty markets; management cited weakness in oil and gas and mining, a stronger U.S. dollar affecting international sales, and pricing pressure, particularly in wireless carrier markets.
- First-half sales fell in both U.S. and international markets: 16.2% and 13.6%, respectively. Lower volumes, product mix and lower-margin product sales contributed to the first-half gross-margin decline.
- SG&A decreased 17.3% in Q2 and 14.4% in the first half, reflecting cost-reduction efforts. Personnel reductions implemented around fiscal year-end 2015 were expected to save approximately $1.0 million annually beginning in FY2016. Centric Solutions also reduced costs after its lease expired and its operations moved to OCC’s Dallas-area facility.
- The Q2 net loss widened year over year mainly because the income-tax benefit fell to $10,000 from $431,000. For the first half, OCC recorded $14,000 of tax expense versus a $676,000 benefit. A $2.4 million valuation allowance had been established against deferred tax assets in FY2015; future realization is uncertain.
- Effective February 1, 2016, OCC acquired the remaining Centric Solutions membership interests for nominal amounts, making it wholly owned. The transaction eliminated noncontrolling interest and reduced OCC-attributable equity by $764,000.
Liquidity, outlook and risks
- On April 26, OCC replaced its SunTrust commercial loan with a BNC revolving facility of up to $7.0 million. At period-end, $6.0 million was drawn and $1.0 million remained available. The rate was adjusted LIBOR plus 3.65% (4.13% at April 30); maturity is February 28, 2018, unless extended. Capacity steps down to $6.5 million in February 2017 and $6.0 million in February 2018. The facility is secured by company assets and cross-collateralized with real property.
- Real-estate term loans carry fixed interest at 4.25%, with final payments due April 30, 2018. Management said cash, operating cash flow and existing or additional credit facilities should fund operations for at least the next 12 months.
- FY2016 capital expenditures were budgeted at $1.8 million; $507,000 had been spent on property and equipment in the first half. The filing gives no specific revenue or earnings forecast. Management expects historical seasonality may bring relatively higher sales in the second half, but cautions that sales are not reliably predictable from seasonality.
- Risks highlighted include continued weakness in specialty end markets, customer and project timing, foreign-exchange effects, competitive pricing, raw-material and transportation cost fluctuations, customer concentration, and dependence on suppliers and key customers. Management considered ordinary-course claims and regulatory matters not likely to materially harm financial position, results or liquidity.
Important facts for investors to verify
- Whether sales and margins recover in the second half, and whether the anticipated cost savings offset weak volumes and pricing pressure.
- Availability under the revolving facility as its borrowing limit steps down, compliance with lender requirements, and the ability to refinance or repay debt due in 2018.
- Cash generation and working-capital trends, particularly inventory reductions and the low cash balance relative to total debt.
- Whether taxable income supports any future release of the $2.4 million deferred-tax valuation allowance; no realization is assured.
- Potential effects of customer concentration, seasonality and the disclosed market risks; the filing identifies two customers contributing 14.1% and 9.3% of Q2 sales.