Optical Cable Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; comparable period is the three months ended January 31, 2018. The interim financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets.
Financial performance and condition
| Metric | Q1 FY2019 / Jan. 31, 2019 | Comparable / prior balance |
|---|---|---|
| Net sales | $16.75 million | $17.55 million; down 4.6% |
| Gross profit and margin | $3.56 million; 21.3% | $5.23 million; 29.8% |
| SG&A expenses | $6.77 million | $5.56 million; up 21.9% |
| Operating loss | $3.22 million | $331,000 |
| Net loss / diluted loss per share | $3.31 million / $0.44 | $410,000 / $0.06 |
| Operating cash flow | $(1.15) million | $(298,000) |
| Cash / working capital | $418,000 / $22.6 million | Cash: $177,000 at Oct. 31, 2018; working capital: $24.0 million |
| Total assets / liabilities | $42.17 million / $18.67 million | $43.10 million / $16.29 million at Oct. 31, 2018 |
| Debt | $4.8 million revolver borrowings; $6.36 million real-estate term debt | Revolver: $3.0 million at Oct. 31, 2018 |
Current assets were $30.27 million and current liabilities $7.71 million, a 3.9-to-1 current ratio, down from 4.4-to-1 at fiscal year-end. The $7.0 million revolving line had $2.2 million available at January 31, 2019. Revolver interest was LIBOR plus 2.50% (5.02% at quarter-end), with maturity on April 30, 2020. Term loans carry a 3.95% fixed rate and are secured by company assets and real property.
Investing cash outflow was $344,000, including $318,000 for property and equipment. Financing provided $1.74 million, primarily from net revolver borrowings. Inventory rose $2.01 million during the quarter; receivables fell $2.98 million. Fiscal 2019 capital expenditures were budgeted at $2.5 million, with no material commitments outstanding at quarter-end.
Material changes and management commentary
- Sales fell in both specialty and enterprise markets. Management attributed part of the specialty-market decline to a $1.2 million military project in Q1 FY2018 that did not recur. U.S. sales declined 2.0%; sales outside the U.S. declined 14.1%.
- Management cited throughput constraints and inefficiencies at the Roanoke facility following workforce expansion, training, restructuring and process changes. These initiatives are intended to improve capacity and efficiency, but contributed to lower sales and margins. Approximately $870,000 of additional labor-related costs, plus other costs, reduced Q1 gross profit.
- SG&A rose primarily due to a $1.1 million increase in employee-related costs, including a $749,000 increase in share-based compensation. The additional share-based expense related to previously granted performance awards vesting January 31, 2019; management did not expect this higher expense to recur in the remaining FY2019 quarters. No similar long-term performance-based grants were made in January 2019.
- Quarter-end order backlog/forward load was $10.0 million, about 5–6 weeks of sales, versus $8.0 million, about 7–8 weeks, at October 31, 2018.
- Share-based compensation expense was $862,000, compared with $113,000 a year earlier. The company withheld 257,222 shares for taxes upon vesting; outstanding shares were 7,436,907 at January 31, 2019.
Outlook, risks and other items
There is no specific earnings or sales guidance in the filing. Management warned that Roanoke facility constraints and inefficiencies could continue to adversely affect sales and gross margin in Q2 FY2019, while it works to realize the intended benefits of the operational changes. Management believes cash, operating cash flow and existing or additional credit facilities should fund operations for at least the next 12 months.
Risks highlighted include volatile order timing and customer concentration, project and market demand, product mix and lower-margin hybrid cables, competition, raw-material and transportation costs, supplier and customer dependence, manufacturing capacity and execution, and access to financing and compliance with debt covenants. Two customers accounted for 13.4% and 16.6% of Q1 FY2019 sales. Management said ordinary-course claims, legal actions and regulatory reviews are not expected to materially affect the company, but outcomes are uncertain.
OCC adopted revenue-recognition Topic 606 on November 1, 2018 using the modified retrospective method; it reported no material impact on results, financial position or liquidity and recorded a $61,763 increase to opening retained earnings. Management expected the new lease standard could increase long-term assets and liabilities, depending on decisions concerning two existing real-estate leases, but did not expect a material overall impact. Management reported disclosure controls were effective as of January 31, 2019 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Roanoke throughput improvements reduce production costs and support recovery in sales and gross margin, particularly in Q2.
- Whether the $10.0 million backlog converts to revenue on schedule and whether large customer or project timing materially changes demand.
- Inventory levels, receivables collection and operating cash flow, given the quarterly cash use and increased inventory.
- Revolver utilization, remaining availability, maturity and compliance with lender covenants; the filing does not provide a clear covenant headroom value.
- Whether warranty claims, tax valuation allowances, lease adoption or ordinary-course contingencies have a material future financial effect.