Optical Cable Corporation — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021; comparisons are to the three months ended January 31, 2020 unless noted. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment, and wireless-carrier markets.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $11.88 million | $12.89 million | Down 7.8% |
| Gross profit | $2.31 million | $2.40 million | Down 3.9% |
| Gross margin | 19.4% | 18.7% | Up 0.7 percentage point |
| SG&A | $4.31 million | $4.82 million | Down 10.7% |
| Operating loss | $2.00 million | $2.45 million | Improved |
| Net loss | $2.14 million | $2.59 million | Improved |
| Basic and diluted loss per share | $0.29 | $0.35 | Improved |
| Operating cash flow | $525,000 | $544,000 | Lower |
Lower sales reflected weakness in both enterprise and specialty markets, including wireless carrier, which management attributed to COVID-19 impacts on customers and delayed or paused projects. Gross margin improved despite lower sales; management cited actions taken in FY2019 and FY2020. SG&A savings primarily reflected lower employee-related costs and travel, including pandemic-related reductions in business travel and trade shows. Interest expense contributed to higher net other expense year over year.
Financial position and liquidity
- At January 31, 2021, cash was $452,000; working capital was $15.1 million and the current ratio was 2.6:1, versus $19.1 million and 4.0:1 at October 31, 2020. The working-capital decline reflected lower receivables, higher payables and accrued expenses, and reclassification of $1.7 million of PPP debt to current.
- Total assets were $35.4 million and total liabilities were $22.2 million. Shareholders’ equity was $13.2 million, down from $15.3 million at October 31, 2020, primarily due to the quarterly net loss.
- Operating cash flow was $525,000, supported in part by a $1.3 million receivables decrease and a $1.4 million increase in accounts payable and accrued compensation, partly offset by higher inventory and lower other noncurrent liabilities. Investing activities used $57,000; financing activities used $158,000.
- Debt included approximately $4.9 million outstanding on the asset-secured revolver, $5.1 million of real-estate term loans, and a $5.0 million PPP loan. The revolver had $1.2 million of available credit and a 4.75% interest rate at quarter-end. Real-estate loans bear fixed 3.95% interest.
- Management stated that cash on hand, operating cash flow, and existing credit facilities are expected to fund operations for at least the next 12 months. Capital expenditures were expected not to exceed $750,000 in FY2021; no material commitments were outstanding at quarter-end.
Outlook, risks, and notable items
- Management reported early positive indicators in some markets and hoped to benefit from improvement in the second half of FY2021. It cautioned that COVID-19 impacts on sales could continue beyond Q2 and that the duration and effects of the pandemic could not be reliably predicted. This is not a quantified sales or earnings forecast.
- OCC applied on February 22, 2021, for forgiveness of the entire PPP loan balance, including accrued interest, and believed it met the forgiveness requirements. Forgiveness had not been confirmed in the filing. If not forgiven, the company described monthly principal and interest payments of approximately $560,000 beginning ten months after the coverage period; the loan matures April 15, 2022.
- Key risks include pandemic-related demand and operational disruption, customer and project timing, sales volatility and concentration, competition and product mix, raw-material and transportation costs, supplier dependence, access to financing, and the possibility of PPP forgiveness denial. One national distributor accounted for 23.3% of Q1 sales, compared with 14.8% for a national distributor in the prior-year quarter.
- Management said ordinary-course claims and regulatory matters were not expected to have a material adverse effect. The company reported effective disclosure controls as of January 31, 2021 and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check whether the SBA PPP loan was forgiven, and confirm any resulting cash-flow or balance-sheet effects.
- Track sales recovery, delayed projects, and customer concentration, particularly the leading distributor’s share of revenue.
- Assess liquidity and borrowing availability as current liabilities rise and working capital declines; monitor revolver availability and debt payments.
- Evaluate whether gross-margin improvement and SG&A savings are sustainable as production, sales mix, and pandemic conditions change.
- Compare actual FY2021 capital expenditures and second-half market performance with management’s stated expectations.