Optical Cable Corporation — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended July 31, 2013. The company manufactures fiber-optic and copper cabling and connectivity products for commercial, enterprise, military, and specialty markets. Financial statements are unaudited.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $19.6 million | $22.0 million | $56.0 million | $61.4 million |
| Gross profit | $6.1 million | $8.8 million | $19.3 million | $23.8 million |
| Gross margin | 31.3% | 39.9% | 34.5% | 38.8% |
| Operating income (loss) | $(101,000) | $1.9 million | $444,000 | $3.7 million |
| Net income (loss) attributable to OCC | $(125,000) | $1.2 million | $48,000 | $2.3 million |
| Basic and diluted earnings (loss) per share | $(0.02) | $0.18 | $0.01 | $0.36 |
Q3 SG&A was $6.2 million, down 10.8%; for the nine months it was $18.7 million, down 7.5%. Q3 operating performance was also affected by $64,000 of net royalty expense, compared with $22,000 of net royalty income a year earlier. Interest expense was $346,000 for the nine months, down from $436,000.
Cash flow, balance sheet, and liquidity
- For the first nine months, operating cash flow was $1.4 million, investing cash outflow was $2.8 million, and financing cash inflow was $1.4 million. Cash declined by $41,000 to $550,000.
- Capital spending and deposits for property and equipment totaled $2.7 million; intangible-asset investment was $137,000. Management reported a further $200,000 capital commitment and a fiscal-year capital-expenditure budget estimate of $3.8 million.
- At July 31, current assets were $33.2 million and current liabilities were $6.0 million; working capital was $27.2 million and the current ratio was 5.5:1. Total assets were $47.9 million.
- Bank revolving borrowings were $3.75 million, with approximately $2.2 million available under the then-existing facility. Long-term real-estate debt was $7.8 million, including current installments; combined bank and term borrowings were approximately $11.6 million.
- On August 30, 2013, after quarter-end, the company replaced its revolving facility: the maximum line increased from $6 million to $9 million, the rate became LIBOR plus 2.2% (then 2.4%), and maturity was extended to August 31, 2015. Borrowing availability is subject to a collateral-based formula.
Changes, outlook, and risks
- Q3 sales fell 10.9% year over year, but increased 2.5% sequentially. Management attributed the annual decline primarily to approximately $5.1 million of prior-year orders from two major customers that did not recur at the same level. Excluding those customers, Q3 sales would have increased 4.8%. For the nine months, sales declined 8.7%; excluding approximately $11 million of prior-year orders from those customers, management said sales would have increased slightly.
- Gross margin fell as lower volume spread fixed manufacturing costs over fewer sales and the Roanoke facility incurred production costs to broaden capabilities. Specialty-market sales increased, while commercial-market sales decreased.
- Management said the expiration of patents during FY2012 reduced royalty income and expected net royalty expense to largely or completely offset royalty income during FY2013. The related developed-technology asset was fully amortized by Q3.
- The company cited historical seasonality, with sales generally stronger in the second half, but cautioned that large-project timing and economic conditions can alter that pattern. It gave no specific revenue or earnings forecast. Management believed cash, operating cash flow, and credit facilities would fund operations for at least the next 12 months.
- Risks identified include demand and timing from key customers, economic and IT-spending conditions, competition and pricing, product mix, material and transportation costs, supplier/customer concentration, technology changes, and execution of growth plans. One customer represented 10.6% of Q3 sales; no customer exceeded 10% of nine-month FY2013 sales. Management said ordinary-course legal and regulatory matters were not expected to materially affect the company.
- The company repurchased 129,500 shares for $543,000 during the nine months and declared dividends of $0.06 per share. The quarterly dividend rate was $0.02 per share. Disclosure controls were deemed effective as of July 31, 2013, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether sales and margins recover as the company laps the large prior-year customer orders, and whether the stated ex-customer growth persists.
- Whether Roanoke production investment supports higher volumes and improved gross margins, and how the remaining capital budget is funded.
- Current revolver utilization and borrowing-base availability under the post-quarter refinancing, along with the effect of variable-rate borrowing costs.
- The effect of patent expirations and lower royalty income on ongoing earnings, and the sustainability of dividends and share repurchases given thin nine-month net income and investment needs.
- Customer concentration, seasonal order timing, and the risks management identified around market demand, competition, suppliers, and input costs.