Optical Cable Corporation — Q2 FY2012 Form 10-Q
Business context and reporting period. Optical Cable Corporation manufactures fiber-optic and copper data-communications cabling and connectivity products. This unaudited quarterly report covers the three and six months ended April 30, 2012; the fiscal year ends October 31.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $22.1 million | $17.2 million | $39.4 million | $34.9 million |
| Gross profit | $8.9 million | $5.9 million | $15.0 million | $12.4 million |
| Gross margin | 40.2% | 34.6% | 38.1% | 35.4% |
| SG&A expenses | $7.4 million | $6.1 million | $13.4 million | $12.1 million |
| Net income attributable to OCC | $949,000 | Net loss $90,000 | $1.14 million | $312,000 |
| EPS, basic and diluted | $0.15 | $(0.02) | $0.18 | $0.05 |
- Q2 sales rose 28.3%, setting a company quarterly record; first-half sales rose 12.9%. Growth was driven principally by fiber-optic cable sales. Both commercial and specialty markets grew in Q2; first-half commercial growth was partly offset by lower specialty-market sales.
- Gross margin improved alongside higher sales volumes and product mix. SG&A rose 21.9% in Q2 and 10.9% for the half, mainly from employee-related and shipping costs, but declined as a share of sales.
- Operating cash flow was $101,000 for the half, versus $1.04 million a year earlier. Receivables increased $1.6 million and inventories increased $1.4 million, absorbing cash. Investing cash outflow was $518,000; financing cash inflow was $356,000. Cash decreased $60,000 to $1.03 million.
- At April 30, cash was $1.03 million, working capital $26.0 million, and the current ratio 4.2:1. Total assets were $47.0 million and total liabilities $17.9 million. Long-term debt, including current installments, was $8.10 million; bank revolver borrowings were $750,000, with about $5.3 million of availability. The real-estate loans bear 5.85% fixed interest and mature April 30, 2018; the revolver matures May 31, 2013.
- The quarterly dividend increased to $0.015 per share in January 2012; $0.03 per share was declared for the first half. The board’s authorization to repurchase up to 200,000 shares remained unused at April 30.
Outlook, risks and notable items
- At the end of May, order backlog/forward load was $8.4 million, or approximately five to six weeks of sales, above the usual $4.0–$5.0 million range. Management said this made a positive Q3 sales and earnings impact similar to Q2 likely; this is not quantified full-year guidance.
- Management expects royalty income to continue declining in FY2012 following expiration of certain patents; related intangible-asset amortization is also expected to decline. Net royalty income was $287,000 for the first half, down from $398,000.
- Two customers generated approximately $4.8 million of Q2 sales and $5.9 million of first-half sales. One domestic customer represented 13.3% of Q2 sales. This concentration and the timing of large orders create potential variability.
- Centric Solutions reported first-half revenue of $864,000 and an operating loss of $341,000. Other disclosed risks include seasonality, market and technology changes, competition, material and shipping costs, key customer and supplier dependence, and execution of business plans.
- Management said ordinary-course claims and regulatory matters were not expected to materially affect financial position, results or liquidity. Disclosure controls were considered effective, with no material quarterly change in internal control over financial reporting. Management believed cash, operating cash flow and credit facilities would fund operations for at least the next 12 months.
Important facts for investors to verify
- Whether the elevated May backlog converted to recognized sales and earnings in Q3, and whether demand remains concentrated in a small number of large orders.
- Whether receivables and inventory growth unwind into cash, given first-half operating cash flow of only $101,000 despite higher earnings.
- The extent and timing of further royalty-income declines after patent expirations, and the ongoing losses at Centric Solutions.
- Liquidity and borrowing availability under the asset-based revolver, including its May 2013 maturity and collateral terms.
- The effect of restricted-stock grants and share-based compensation on dilution; 444,157 restricted shares were granted during the first half, and 6,693,638 common shares were outstanding at April 30.