Optical Cable Corporation — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended April 30, 2017; 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 | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $15.85 million | $16.34 million | $30.45 million | $30.39 million |
| Gross profit / margin | $5.66 million / 35.7% | $4.55 million / 27.9% | $10.47 million / 34.4% | $8.05 million / 26.5% |
| Operating loss | $281,000 | $856,000 | $700,000 | $2.46 million |
| Net loss attributable to OCC | $239,000; $0.04/share | $983,000; $0.15/share | $855,000; $0.13/share | $2.73 million; $0.43/share |
- Q2 sales declined 3.0% year over year but rose 8.5% sequentially from Q1 FY2017. First-half sales were up 0.2%.
- Gross margin improvement was primarily attributed to a shift toward higher-margin products. SG&A rose 10.2% in Q2 and 6.2% in the first half, reflecting higher employee-related costs, legal fees and marketing expenses.
- At April 30, cash was $797,000, down $1.08 million from October 31, 2016. Working capital was $22.3 million; the current ratio was 4.6:1, down from 6.4:1.
- First-half operating cash flow was negative $501,000, versus positive $598,000 a year earlier. Inventory increased $2.52 million and receivables increased $599,000; higher payables and accrued expenses provided a partial offset. Investing cash use was $203,000 and financing cash use was $378,000.
- Total assets were $42.0 million and total liabilities $17.8 million. Debt comprised $4.9 million drawn on the revolver and $6.8 million in real-estate term loans. The company had $2.1 million of remaining revolver availability.
Changes, outlook and risks
- Specialty-market sales rose in Q2 despite significant weakness in military and wireless-carrier business, offset by lower enterprise sales. For the first half, enterprise sales increased, while specialty sales fell, primarily due to military and wireless-carrier weakness. First-half U.S. sales rose 3.2%; non-U.S. sales fell 10.5%, affected by the strong U.S. dollar.
- Q2 other income included a reversal of approximately $171,000 previously accrued following favorable resolution of certain legal matters. The filing does not identify this as the later Hazelton settlement, which was reached in May after quarter-end.
- The revolver’s $7.0 million limit and maturity were extended to March 31, 2019; its rate was LIBOR plus 2.5% (3.48% at April 30), subject to a 2.5% floor. Term-loan rates were revised to 3.95% and maturities extended to May 1, 2024. Facilities are secured by company assets and real property.
- Management gave no specific sales or earnings guidance. It said sales are typically higher in the second half, but project timing and economic conditions can disrupt seasonality. Management believes cash, operating cash flow and existing facilities will fund operations for at least 12 months. FY2017 capital expenditures were budgeted at $2.0 million; no material commitments existed at quarter-end.
- Risks include customer and project concentration, market and product-mix variability, foreign-exchange effects, competition, raw-material and supplier exposure, and debt-covenant and financing risks. One customer generated 16.5% of first-half sales.
- Legal matters: the Hazelton litigation was settled in May 2017 for less than the previously accrued minimum earn-out amount and dismissed with prejudice. The company also settled with DiBella without monetary impact; claims against Roehrs remained pending. Management said ordinary-course claims are not expected to materially affect financial position, results or liquidity.
- Management reported disclosure controls were effective as of April 30, 2017, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether improved gross margins persist if product mix changes, particularly given continued military and wireless-carrier weakness.
- Whether working-capital investment in inventory and receivables converts to cash, and whether liquidity remains adequate with only $797,000 cash and $2.1 million revolver availability.
- The effect of the post-quarter Hazelton settlement versus accrued amounts, and the eventual outcome of the pending claims against Roehrs.
- Whether increased SG&A—especially compensation, marketing and legal costs—moderates as management expects.
- The company’s progress evaluating the new revenue-recognition standard, effective for OCC beginning in FY2019; its adoption impact was still under evaluation.