Optical Cable Corporation (OCC) — Q2 FY2021 Form 10-Q
Business context and reporting period. The unaudited quarter and six-month periods ended April 30, 2021. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment, and wireless-carrier markets. Results remained affected by COVID-19 disruptions, with management reporting signs of market recovery in Q2.
Financial performance and position
| Metric | Q2 FY2021 | Six months FY2021 |
|---|---|---|
| Net sales | $15.74 million; up 5.9% year over year | $27.62 million; down 0.5% |
| Gross profit / margin | $4.82 million / 30.6%, versus $4.00 million / 26.9% | $7.13 million / 25.8%, versus $6.40 million / 23.1% |
| SG&A | $4.59 million, down 17.3% | $8.90 million, down 14.2% |
| Operating income (loss) | $261,000, versus a $1.56 million loss | $(1.74) million, versus a $4.01 million loss |
| Net income (loss) | $3.39 million, or $0.45 per share | $1.24 million, or $0.17 per share |
| Operating cash flow | $(392,000) for the six months, versus $(816,000) in the prior-year period |
Q2 other income included a $3.38 million Employee Retention Tax Credit (ERTC), recorded as income and a receivable; it was the principal reason reported net income was substantially above operating income. For the six months, the ERTC also helped offset an operating loss. Management expected approximately $900,000 of additional ERTC for the remainder of calendar Q2, to be recorded in fiscal Q3.
At April 30, 2021, cash was $361,000; working capital was $18.2 million, with a 2.6:1 current ratio (4.0:1 at October 31, 2020). Total assets were $40.5 million and total liabilities $23.8 million. Borrowings were approximately $15.9 million, including $5.9 million on the revolver, $5.0 million under the PPP loan, and $5.0 million of real-estate term debt. The revolver had $2.5 million of available credit. Six-month investing cash outflow was $105,000; financing cash inflow was $717,000.
Changes versus prior comparable periods
- Q2 sales improved year over year and rose 32.5% sequentially from Q1; management attributed the improvement partly to reopening of markets affected by COVID-19.
- Gross margin expanded in both Q2 and the six-month period. Management cited higher sales and improved absorption of fixed manufacturing costs, as well as actions taken in fiscal 2019 and 2020; product mix also affects margins.
- Lower SG&A reflected reduced employee-related costs, bad-debt expense, travel, and marketing. Prior-year bad-debt expense had risen amid pandemic-related collectability concerns.
- Six-month sales were nearly flat despite improved Q2 performance. U.S. sales declined 1.2% for the half while international sales increased 2.4%.
Outlook, risks, and unusual items
- Management was hopeful that improving markets would support further progress in the second half of FY2021, but gave no quantified sales or earnings guidance and said pandemic effects could not be reliably estimated.
- Management stated that cash, operating cash flows, and existing credit facilities should fund operations for at least 12 months. FY2021 capital expenditures were expected not to exceed $750,000; there were no material capital-expenditure commitments at quarter-end.
- The $4.98 million PPP loan, plus accrued interest, was classified as current. OCC applied on February 22, 2021 for forgiveness of the entire balance and believed it met the requirements; forgiveness was not yet confirmed. If not forgiven, the filing describes monthly payments of approximately $560,000 beginning after the applicable deferral period.
- COVID-19 impacts, market recovery, order timing, seasonality, product mix, raw-material and transportation costs, competition, and access to financing remain risks. One national distributor accounted for 16.6% of Q2 sales and 19.5% of six-month sales.
- Ordinary-course claims and regulatory reviews were not expected by management to have a material adverse effect. Management reported disclosure controls were effective as of April 30, 2021, with no material quarter-end change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the PPP loan and accrued interest are forgiven, and the timing and amount of any repayment obligation if not.
- Collection and timing of the $3.38 million ERTC receivable and the additional credit management expected to record.
- Whether reported sales recovery and margin improvement continue without the one-time ERTC benefit, given the six-month operating loss and negative operating cash flow.
- Liquidity and revolver availability, including the impact of working-capital needs, customer concentration, and debt obligations.
- Whether COVID-19 recovery, customer project timing, seasonality, and product mix support management’s second-half expectations.