Optical Cable Corporation — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 31, 2023; comparative period ended January 31, 2022. Financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty/harsh-environment, and wireless-carrier markets.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 / comparison |
|---|---|---|
| Net sales | $18.28 million | $14.44 million; up 26.6% |
| Gross profit / margin | $6.52 million / 35.7% | $4.05 million / 28.0% |
| SG&A | $5.46 million; 29.8% of sales | $4.78 million; 33.1% of sales |
| Operating income (loss) | $1.05 million | $(0.75) million |
| Net income (loss) | $810,000; $0.10 per share | $(936,000); $(0.12) per share |
| Net cash used in operating activities | $(630,000) | $(1.86) million |
| Capital expenditures and investing cash flow | $105,000 capex; $(106,000) net investing cash flow | $73,000 property/equipment purchases; $(81,000) net investing cash flow |
Sales increased in enterprise and specialty markets, including wireless carrier. U.S. sales rose 20.0% and sales outside the U.S. rose 61.4%. Gross margin improvement reflected higher sales and operating leverage; management also cited improved pricing on new orders beginning in the second half of FY2022. SG&A rose 14.1%, mainly from higher sales personnel costs and shipping, but declined as a share of sales.
Financial position and liquidity
- At January 31, 2023, cash was $186,000, current assets $33.11 million, current liabilities $7.71 million, and working capital $25.4 million. The current ratio was 4.3:1.
- Inventory was $22.26 million, up $2.82 million from October 31, 2022; receivables were $9.91 million, down $1.05 million. Management attributed the inventory increase mainly to raw-material purchases, work in process for pending shipments, and replenishment of finished goods.
- Total debt was approximately $11.27 million: $6.82 million outstanding on the revolving facility and $4.45 million on real-estate term loans. Revolver availability was $4.8 million. The revolver rate was 9.0% at quarter-end; real-estate loans carry fixed 3.95% rates.
- Operating cash outflow improved year over year but remained negative, primarily reflecting the $2.82 million inventory build. Net revolver borrowings were $823,000. Cash declined by $30,000 during the quarter.
- Management believes cash on hand, operating cash flow, and existing credit facilities will fund operations for at least the next 12 months.
Outlook, commentary, and risks
- Management reported sales order backlog/forward load above $11 million at quarter-end, down from above $12 million at FY2022 year-end. It cited positive market indicators and expected to benefit from the trend during FY2023, while warning that macroeconomic, geopolitical, and pandemic-related risks could impair expectations. No quantified revenue or earnings guidance was provided.
- Management says production and sales have been affected by hiring constraints, particularly for production workers, and raw-material supply challenges. These issues may affect volumes, pricing, and lead times and may continue.
- OCC typically expects lower sales in the first half and higher sales in the second half, but cautions that customer orders, large projects, wireless-carrier volatility, and broader conditions make seasonality an unreliable predictor.
- One national distributor represented 14.8% of quarterly sales, compared with 17.2% in the prior-year quarter. The company has one reportable segment.
- At October 31, 2022, OCC had a $4.4 million valuation allowance against gross deferred tax assets. Management notes future effective tax rates could be unusually low if the allowance is reduced or removed; realization is not assured.
- A December 2022 burst sprinkler pipe caused water damage at an Asheville office building, separate from manufacturing operations. OCC recorded an $8,000 property-and-equipment loss and $81,000 of related expenses, with $76,000 of insurance proceeds receivable, net of deductibles. Management expects no material overall financial impact and reported no significant operational impact.
- Ordinary-course claims, legal actions, and regulatory reviews are not expected by management to materially affect financial position, results, or liquidity. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Key facts for investors to verify
- Whether sales growth, the margin improvement, and backlog above $11 million persist, given order timing, customer concentration, product mix, and normal seasonality.
- Whether the inventory build converts to shipments and operating cash flow, and whether inventory levels or supply constraints create execution or obsolescence risk.
- Revolver borrowing, availability, and the effect of the 9.0% rate on interest expense and liquidity; confirm ongoing covenant compliance and financing access.
- Progress in recruiting production personnel and resolving raw-material supply issues, and any resulting changes in production, lead times, or customer demand.
- Insurance recovery and final costs associated with the Asheville water damage, as well as any developments in ordinary-course contingencies or the deferred-tax valuation allowance.