Optical Cable Corporation — Q3 FY2012 Form 10-Q
Business context and reporting period. Optical Cable Corporation manufactures fiber-optic and copper cabling and connectivity products for enterprise, commercial, military, industrial and other specialty markets. This unaudited filing covers the three and nine months ended July 31, 2012; balance-sheet comparisons are to October 31, 2011.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Net sales | $22.0 million, up 17.2% from $18.8 million | $61.4 million, up 14.4% from $53.7 million |
| Gross profit / margin | $8.8 million / 39.9%, versus $6.5 million / 34.7% | $23.8 million / 38.8%, versus $18.9 million / 35.2% |
| Operating income | $1.88 million, versus $0.42 million | $3.73 million, versus $0.91 million |
| Net income attributable to OCC | $1.17 million ($0.18 per share), versus $118,000 ($0.02 per share) | $2.31 million ($0.36 per share), versus $430,000 ($0.07 per share) |
| SG&A | $6.90 million, up 10.8%; 31.4% of sales versus 33.2% | $20.27 million, up 10.9%; 33.0% of sales versus 34.1% |
Sales growth primarily reflected increased fiber-optic cable sales, including approximately $5.1 million of orders from two customers in the quarter. Commercial-market growth was partly offset by lower specialty-market sales. U.S. sales rose 10.8% in the quarter and 10.5% year to date; sales outside the U.S. rose 39.1% and 26.5%, respectively. Gross margin benefited from product mix, higher volumes and fixed-cost absorption. Management described quarterly SG&A as a percentage of sales as its lowest in more than five years.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $1.10 million, compared with $966,000 a year earlier. Receivables and inventory increases used approximately $2.6 million and $2.5 million, respectively.
- Investing cash outflow was $838,000, mainly for property and equipment. Financing cash outflow was $143,000. Cash rose $115,000 to $1.21 million.
- At July 31, current assets were $36.3 million and current liabilities $9.1 million; working capital was $27.2 million and the current ratio was 4.0, versus $23.3 million and 3.8 at October 31, 2011. Receivables and inventory were the main drivers of the working-capital increase.
- Total liabilities were $19.3 million. Long-term debt was $8.05 million and bank revolver borrowings were $1.30 million, versus no revolver balance at October 31, 2011. The revolver had approximately $4.7 million of availability and matured May 31, 2014. Term loans were due April 30, 2018.
- On August 31, 2012, after quarter-end, the term-loan rate was reduced from 5.85% to 4.25%; repayment installments were revised and maturity was unchanged. The company reported approximately $1.1 million of operating cash flow for the nine months and said cash, operating cash flow and existing facilities should fund operations for at least 12 months.
- The company completed its repurchase of 200,000 shares for approximately $876,000 during the nine months and declared quarterly dividends of $0.015 per share. Year-to-date dividends declared were $0.045 per share.
Outlook, commentary and risks
- At the end of August, backlog/forward load was $8.9 million, or approximately five to six weeks of sales, versus a typical $4–$5 million (three to four weeks). Management said it believed this elevated backlog made a positive Q4 sales and earnings impact similar to Q2 and Q3 likely. This was an expectation, not formal quantitative guidance.
- Management attributed the elevated backlog and sales gains particularly to new fiber-optic cable business from two customers. One domestic customer accounted for 17.6% of quarterly sales and 12.2% of nine-month sales; no customer exceeded 10% in the comparable 2011 periods.
- Royalty income declined to $22,000 for the quarter and $310,000 year to date, primarily because certain patents expired. Management expected royalty income to continue declining for the rest of FY2012; amortization expense was also expected to decline.
- Centric Solutions generated $1.62 million of nine-month revenue but incurred a $320,000 operating loss; it reported a $21,000 operating profit in Q3. Its assets were approximately $570,000.
- Risks identified include order timing and key-customer concentration, seasonality, economic and IT spending conditions, competition and pricing, raw-material and shipping costs, supplier and production-facility dependence, technology changes, and replacing royalty income as patents expire. Management stated ordinary-course claims and regulatory matters were not expected to materially adversely affect the company.
- The company had committed approximately $1.1 million for fiber-optic manufacturing equipment, of which about $151,000 had been spent by July 31; its FY2012 capital-expenditure budget was $2.5 million. Management noted actual spending has historically been below budget.
Most important facts for investors to verify
- Whether the unusually high August backlog converted into completed sales, and how much growth depended on the two large-order customers.
- Whether gross-margin improvement persists as product mix and order volumes change, and whether working-capital growth in receivables and inventory is collected or sold through.
- The ongoing effect of patent expirations on royalty income and the performance of loss-making Centric Solutions.
- The terms and covenant implications of the post-quarter term-loan modification, revolver availability and the company’s ability to fund planned capital spending.