Optical Cable Corporation — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018. OCC manufactures fiber-optic and copper cabling and connectivity products, serving enterprise, specialty and harsh-environment markets, including military and wireless carriers. Figures below are unaudited.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 / comparison |
|---|---|---|
| Net sales | $17.55 million | $14.61 million; up 20.2% |
| Gross profit / margin | $5.23 million / 29.8% | $4.81 million / 32.9% |
| SG&A | $5.56 million | $5.19 million; up 7.0% |
| Operating loss | $331,000 | $419,000 loss |
| Net loss / diluted loss per share | $410,000 / $0.06 | $616,000 / $0.09 loss |
| Cash from operations | $298,000 used | $69,000 used |
- Net sales were up 2.0% sequentially from Q4 FY2017. Specialty-market sales, particularly military and wireless carrier, increased; enterprise sales declined. Sales outside the U.S. rose 32.1%, while U.S. sales rose 17.3% year over year.
- Gross margin fell 3.1 percentage points, mainly due to product mix shifting toward lower-margin products. Management also noted that hybrid cable orders with high copper content tend to carry lower margins.
- SG&A rose by $365,000, primarily from higher employee-related costs, including new hires and sales commissions. As a share of sales, SG&A declined to 31.7% from 35.6%.
- At January 31, cash was $529,000; working capital was $23.0 million and the current ratio was 4.3:1, down from 6.5:1 at October 31, 2017. Receivables increased $2.4 million and inventory increased $840,000; accounts payable and accrued expenses rose $2.4 million.
- Cash decreased $362,000 during the quarter. Investing activities used $68,000; financing activities provided $3,000. Operating cash use reflected working-capital needs, partly offset by higher payables.
- Debt at January 31 included $5.9 million drawn on the $7.0 million revolving facility and $6.61 million of real-estate term loans, for approximately $12.51 million total. Revolver availability was $1.1 million. The revolver rate was 4.07%, with maturity March 31, 2019; real-estate loans carry a fixed 3.95% rate.
Outlook, risks and notable items
- Backlog/forward load was $14.8 million at January 31 (about 11–12 weeks of sales) and increased to $19.0 million at the end of February (about 14–15 weeks). Management said this made a significant positive Q2 year-over-year sales impact likely; this is not formal full-year guidance. Some backlog includes lower-margin hybrid cable orders.
- Management said operating cash flow, cash on hand and existing or additional credit facilities should fund operations for at least 12 months. Given the backlog and timing gap between material payments and customer receipts, the company was working with its lender to increase revolver availability and said it believed its steps would address short-term working-capital needs.
- Fiscal 2018 capital expenditures were budgeted at $2.0 million; there were no material capex commitments at quarter-end. Management noted it historically spends less than budget in most years.
- One customer represented 21.3% of quarterly sales, versus 16.5% attributable to a different customer in the prior-year quarter. Management identifies dependence on key customers, order timing, competition, raw-material and transportation costs, product mix, and economic conditions as risks.
- The Tax Cuts and Jobs Act prompted a $1.3 million reduction in both deferred tax assets and the related valuation allowance, with no income-statement impact. The company continued to maintain a full valuation allowance against net deferred tax assets; future realization is uncertain.
- Ordinary-course legal claims and regulatory reviews were not expected by management to materially adversely affect the company. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the elevated backlog converted to shipments and cash, and whether receivables and inventory were collected or sold without margin deterioration.
- Whether OCC secured additional revolver availability, and the facility’s subsequent availability, borrowing, covenants and refinancing or maturity plans.
- Whether lower gross margin persists as product mix and high-copper hybrid cable orders change.
- How the concentrated customer exposure and sales growth by market developed after quarter-end.
- Whether taxable income supports any release of the deferred-tax valuation allowance, and the resulting tax effects.