Optical Cable Corporation — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparisons are to the three months ended January 31, 2013 unless otherwise noted. The company manufactures fiber-optic and copper cabling and connectivity products for enterprise, commercial, military, industrial, and other specialty markets.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $16.535 million | $17.295 million |
| Gross profit / margin | $5.408 million / 32.7% | $6.524 million / 37.7% |
| Operating income (loss) | $(677,000) | $264,000 |
| Net income (loss) attributable to OCC | $(412,000); $(0.07) per share | $130,000; $0.02 per share |
| Cash from operating activities | $915,000 | $1.513 million |
| Cash used in investing activities | $226,000 | $1.524 million |
| Cash used in financing activities | $712,000 | $73,000 |
Sales declined 4.4%, while gross profit fell 17.1%. Lower sales and product mix pressured gross margin; management also said lower volume spread fixed manufacturing costs over fewer sales. SG&A declined 2.3% to $6.046 million, but rose to 36.6% of sales from 35.8%. The $324,000 income tax benefit compared with $40,000 of tax expense in the prior-year quarter.
Financial position and liquidity
- At January 31, 2014, cash was $727,000, working capital was $26.1 million, and the current ratio was 5.5:1. Working capital was $27.0 million and the current ratio 6.6:1 at October 31, 2013.
- Total assets were $45.3 million and total liabilities $16.2 million. Inventories rose $978,000 to $19.2 million; net trade receivables fell $1.2 million to $8.7 million.
- Debt comprised $7.693 million under real-estate term loans and $2.0 million outstanding on the revolving credit facility. The revolver had $6.6 million of available credit; its rate was 2.37% at quarter-end and its maturity date was August 31, 2015. The real-estate loans carry fixed interest rates of 4.25%.
- Operating cash flow was supported by lower receivables and higher payables, partly offset by inventory growth. Capital expenditures and deposits totaled $205,000. Cash declined $24,000 during the quarter.
Changes, outlook, and risks
- U.S. sales increased 5.7% year over year, while sales outside the U.S. decreased 24.2%. Commercial-market sales increased, but specialty-market sales declined. No customer represented more than 10% of consolidated sales.
- At the end of February 2014, backlog/forward load was $8.1 million, or about 5–6 weeks of sales, above the company’s usual 3–4 weeks. Management said this made a positive second-quarter sales impact versus Q1 likely; the filing gives no full-year earnings or revenue guidance.
- Management cited customary seasonality, with sales historically lower in the first half and higher in the second half, while cautioning that project timing and economic conditions can alter that pattern. It believed cash, operating cash flow, and credit facilities would fund operations for at least the next 12 months.
- The fiscal 2014 capital-expenditure budget was $2.8 million; no material commitments existed at quarter-end. The company paid a $0.02-per-share quarterly dividend and had 123,500 shares remaining under its repurchase authorization; no shares were repurchased in Q1.
- Risks identified include customer and project timing, demand and spending trends, competition, product mix and pricing, raw-material and transport costs, supplier and customer concentration, technology changes, foreign-market fluctuations, and litigation or regulatory matters. Management said ordinary-course claims and reviews were not expected to materially affect financial position, results, or liquidity.
- Centric Solutions, in which OCC owns 70%, generated $190,000 in revenue and an operating loss of $132,000, compared with $254,000 revenue and a $78,000 operating loss in the prior-year quarter.
Other notable disclosures
Management reported disclosure controls and procedures were effective as of January 31, 2014, with no material change in internal control over financial reporting during the quarter. On March 14, 2014, the company amended the CEO’s and CFO’s employment agreements to clarify bonus-program provisions; the filing says the amendments did not increase their existing target bonus opportunities. Management did not expect adoption of ASU 2013-11 to have a material effect.
Important facts for investors to verify
- Whether the elevated February backlog converted into shipments and revenue, and whether it persisted beyond the reported point-in-time figure.
- Whether gross margin recovered from 32.7%, including the effects of specialty-market demand, product mix, sales volume, and manufacturing costs.
- Whether operating cash flow remains adequate as inventory is converted to sales and working-capital balances change.
- Revolver availability and borrowing-base capacity, debt repayments, and the ability to fund the $2.8 million capital-expenditure budget while maintaining dividends.
- Centric Solutions’ continuing operating losses and the financial performance of international and specialty markets.