Optical Cable Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2017. The unaudited filing covers OCC’s fiber-optic and copper cabling and connectivity business, including enterprise, specialty and harsh-environment markets. OCC reports one operating segment.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $16.4 million | $16.9 million | $46.9 million | $47.3 million |
| Gross profit / margin | $5.3 million / 32.3% | $5.5 million / 32.3% | $15.8 million / 33.7% | $13.5 million / 28.6% |
| Operating income (loss) | $(166,000) | $344,000 | $(866,000) | $(2.1) million |
| Net income (loss) attributable to OCC | $(295,000) | $188,000 | $(1.15) million | $(2.54) million |
| Basic and diluted EPS | $(0.05) | $0.03 | $(0.18) | $(0.40) |
- Cash flow: Nine-month operating cash use was $930,000, versus $2.0 million provided in 2016. Investing cash use was $468,000; financing provided $48,000. Cash fell $1.35 million to $529,000.
- Liquidity: Working capital was $22.8 million, compared with $22.2 million at October 31, 2016. The current ratio was 4.9:1, down from 6.4:1.
- Debt: At July 31, long-term real-estate debt totaled $6.73 million, including $248,000 current; revolving borrowings were $5.4 million, leaving $1.6 million available on the $7.0 million line. The revolver rate was 3.72% and maturity March 31, 2019. Real-estate loans carry fixed rates of 3.95% and mature May 1, 2024; facilities are secured by company assets and real property.
- Balance sheet: Total assets were $42.1 million and liabilities $17.9 million. Inventory rose $3.3 million to $18.4 million; accounts payable and accrued expenses rose $1.7 million to $4.3 million.
Changes versus comparable periods
- Q3 sales declined 2.9% year over year, but increased 3.7% sequentially from Q2. Specialty-market sales increased, but military demand remained weak and enterprise sales declined. International sales rose 1.2% in Q3; U.S. sales fell 3.8%.
- Nine-month sales were down 0.9%. Enterprise and specialty sales declined; international sales decreased 6.7%, which management attributed in part to the strong U.S. dollar.
- Nine-month gross margin improved by 5.1 percentage points, primarily from a shift toward higher-margin products. Q3 margin was unchanged year over year.
- SG&A increased 6.9% in Q3 and 6.5% for nine months. Nine-month drivers included employee costs, legal fees and marketing; management said legal fees were not expected to recur at the same level in the final quarter.
- The nine-month net loss narrowed from $2.54 million to $1.15 million, primarily reflecting higher gross profit. Q3 shifted from profit to loss as lower gross profit and higher SG&A outweighed lower interest expense.
- Operating cash flow deteriorated mainly because inventory increased $3.3 million, compared with an inventory reduction that supported cash flow in 2016.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and existing credit facilities should be adequate to fund operations for at least the next 12 months. Fiscal 2017 capital expenditures were budgeted at $2.0 million; no material commitments existed as of July 31.
- OCC describes a typical pattern of stronger sales in the second half, but cautions that seasonality is not reliably predictive. The filing provides no specific revenue or earnings guidance.
- Management cited customer and project timing, competition, product mix, raw-material and transport costs, supplier and customer concentration, foreign-exchange effects, market conditions and access to financing among risks. One customer represented 15.8% of Q3 sales and 16.3% of nine-month sales.
- Other expense for the first nine months included approximately $171,000 of income from reversal of accruals following favorable settlement of certain legal matters. The Hazelton litigation settled in May 2017 for less than the previously accrued earn-out; the filing does not provide a clear settlement amount. Related suits were dismissed with prejudice. Claims against former employee Roehrs remained pending; management did not expect ordinary-course claims to materially affect financial position, results or liquidity.
- Warranty accrual increased to $155,000 from $70,000 at October 31, 2016; nine-month warranty expense rose to $179,000 from $58,000. OCC also had a full valuation allowance against its net deferred tax assets, limiting certainty about future tax benefits.
- Management reported disclosure controls were effective as of July 31, 2017 and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether inventory growth and working-capital requirements convert into shipments, collections and positive operating cash flow.
- Verify progress toward restoring operating profitability, given Q3 losses and elevated SG&A relative to sales.
- Track revolver utilization, remaining availability, debt terms and covenant compliance; the filing does not state a specific covenant status.
- Review the customer concentration and exposure to weak military demand, currency movements and product-mix volatility.
- Monitor warranty claims and the remaining litigation involving Roehrs, along with any financial effects disclosed in later filings.