Optical Cable Corporation — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 31, 2021; comparative periods ended July 31, 2020. Unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets.
Financial results
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $15.63m | $13.64m | $43.25m | $41.39m |
| Gross profit / margin | $4.09m / 26.2% | $3.47m / 25.5% | $11.22m / 25.9% | $9.87m / 23.9% |
| Operating loss | $(0.46)m | $(1.29)m | $(2.20)m | $(5.30)m |
| Net income (loss) | $5.37m | $(1.43)m | $6.62m | $(5.71)m |
| EPS, basic and diluted | $0.71 | $(0.20) | $0.88 | $(0.78) |
- Q3 sales rose 14.6%; nine-month sales rose 4.5%. Management reported higher sales in enterprise and specialty markets, including wireless carrier.
- SG&A was $4.53m in Q3, down slightly from $4.56m; nine-month SG&A fell 10.1% to $13.43m. Nine-month operating loss narrowed, but operations remained loss-making.
- Q3 net income included a $5.04m gain from forgiveness of the PPP loan and $0.965m of Employee Retention Tax Credit (ERTC) income. For the first nine months, these items contributed approximately $5.04m and $4.34m, respectively. Thus, reported net income substantially reflects these non-operating items rather than operating profit.
- Net cash used in operating activities was $0.21m for the first nine months, versus $2.44m used in the prior-year period. Cash declined $0.02m to $0.12m; investing used $0.15m and financing provided $0.34m.
Financial position and liquidity
- At July 31, 2021, total assets were $39.42m, liabilities $17.33m and shareholders’ equity $22.09m. Working capital was $23.4m and the current ratio 5.3, compared with $19.1m and 4.0 at October 31, 2020.
- Cash was $0.12m. Current assets included $9.11m net trade receivables, $15.74m inventories and $3.65m other receivables; the latter included $3.63m of ERTC recognized but not yet refunded.
- The PPP loan, including accrued interest, was fully forgiven July 1, 2021. Revolver borrowings were $5.63m, with $2.2m of available credit; the stated rate was 4.75% and the facility terminates July 24, 2023. Real-estate loans totaled $4.93m at a fixed 3.95%, with final payments due May 1, 2024.
- Operating cash flow remained negative despite reported net income, in part because of the ERTC receivable and higher trade receivables. Management said cash on hand, operating cash flow and existing credit facilities should fund operations for at least the next 12 months.
Changes, outlook and risks
- Compared with Q3 FY2020, sales and gross margin improved, while SG&A was slightly lower. Management attributed margin improvement to higher sales and manufacturing-cost leverage, prior cost actions and product mix.
- Management reported improving markets, sales and production volumes, a rising order backlog/forward load, and finished-goods inventory drawdowns. It expects continued market improvement to benefit Q4 FY2021, but gave no numerical sales or earnings guidance. It does not expect additional ERTC credits for the remainder of FY2021.
- COVID-19 and emerging variants, market recovery, order timing and volatility, customer concentration, product mix, competition, raw-material and transportation costs, supply availability and inflation are cited as uncertainties. One national distributor accounted for 20.9% of Q3 sales and 20.0% of nine-month sales, versus 16.1% and 13.7%, respectively, in the prior-year periods.
- FY2021 capital expenditures were expected not to exceed $0.75m; no material commitments existed at quarter-end. Management said ordinary-course legal and regulatory matters were not expected to materially affect financial position, results or liquidity. Disclosure controls were deemed effective, with no reported material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether the $3.63m ERTC receivable is collected as expected and whether any repayment, eligibility or tax issues arise.
- Underlying operating performance and cash generation excluding PPP forgiveness and ERTC benefits; operating losses persisted through the nine-month period.
- Revolver borrowing-base availability, lender covenants and refinancing or repayment needs ahead of the July 2023 termination.
- Sales and order trends, including dependence on the national distributor and volatility in wireless-carrier and project orders.
- Effects of COVID-19 variants, input-cost inflation, supply constraints and product mix on future margins and liquidity.