Optical Cable Corporation (OCC) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2015. OCC manufactures fiber-optic and copper cabling and connectivity products for commercial, enterprise, military, industrial, and other specialty markets. Financial statements are unaudited.
Key financial results
| Metric | Three months ended July 31, 2015 | Nine months ended July 31, 2015 |
|---|---|---|
| Net sales | $20.8 million, down 1.1% year over year | $56.8 million, down 1.6% |
| Gross profit / margin | $5.7 million / 27.5%, versus $7.3 million / 34.9% | $16.8 million / 29.5%, versus $19.4 million / 33.6% |
| Operating income (loss) | $(0.4) million, versus $0.5 million | $(1.6) million, versus $(0.3) million |
| Net income (loss) attributable to OCC | $(0.6) million; $(0.09) per share, versus income of $0.3 million; $0.04 per share | $(1.3) million; $(0.21) per share, versus loss of $0.3 million; $(0.04) per share |
| Operating cash flow | Not reported separately for the quarter | $1.0 million, versus $1.9 million |
For the nine-month period, cash used in investing was $2.8 million, primarily for property and equipment; cash provided by financing was $1.3 million. Cash declined $0.5 million to $0.6 million.
Financial position and liquidity
At July 31, 2015, total assets were $49.0 million and total liabilities were $20.2 million. Cash was $0.6 million; working capital was $25.4 million and the current ratio was 4.3:1. Trade receivables were $10.8 million and inventory was $18.6 million.
Borrowings comprised $5.0 million under the revolving credit facility and $7.3 million of real-estate term loans, or approximately $12.3 million in total. The revolving facility had $4.0 million of available credit and matured August 31, 2017; its July 31 rate was 2.39%. Term loans bear fixed interest at 4.25%. OCC reported that it was compliant with financial debt covenants, while warning that future negative results could affect compliance.
Material changes and management commentary
- Sales declines in military, oil and gas, and mining specialty markets, along with lower-margin product mix and pricing pressure—particularly in wireless carrier markets—reduced gross profit and margins. Commercial-market growth did not offset specialty-market weakness.
- For the first nine months, U.S. sales increased 1.3%, while international sales fell 11.2%; management cited a strong U.S. dollar and a prior-year large international order that did not recur. In Q3, domestic sales fell 2.2% and international sales rose 3.6% year over year.
- SG&A declined 9.9% in Q3 and 6.9% year to date, reflecting lower employee-related costs and legal and professional fees, as well as cost-control initiatives.
- Capital investment included manufacturing-equipment upgrades intended to expand fiber-optic production capabilities. The fiscal 2015 capital expenditure budget was $5.5 million; the filing reports approximately $2.3 million spent on these upgrades and $1.1 million of additional commitments at July 31.
- OCC maintained a quarterly dividend of $0.02 per share. It also authorized repurchases of up to 400,000 shares over an anticipated 24–36 months; 1,600 shares were repurchased during Q3. Year-to-date repurchases were 80,636 shares for $0.38 million.
Outlook, risks, and contingencies
Management gave no specific sales or earnings forecast. It stated that cash on hand, expected operating cash flow, and existing or potential credit facilities should fund operations for at least the next 12 months. OCC historically experiences higher sales in the second half of its fiscal year, but cautioned that seasonality is not reliably predictive.
Key risks cited include weakness in specialty end markets, customer and project timing, pricing and product-mix pressure, raw-material and transportation costs, currency movements, competition and technology changes, supplier and customer concentration, and the ability to maintain debt-covenant compliance. Two customers represented 12.2% and 14.5% of Q3 sales. Management said ordinary-course claims, legal actions, and regulatory reviews were not expected to materially affect financial position, results, or liquidity. The company was transitioning Centric Solutions’ operations to its Dallas-area facility as its lease approached expiration in November 2015.
Management believed deferred tax assets of approximately $2.7 million were more likely than not to be realized, but noted that sustained negative operating results could require a valuation allowance. Warranty accruals rose to $195,000 from $100,000 at October 31, 2014.
Important facts for investors to verify
- Whether specialty-market demand, pricing, and product mix improve enough to restore gross margins.
- Progress on equipment investment, its expected returns, and remaining capital commitments versus the $5.5 million fiscal-year budget.
- Cash generation, revolver availability, covenant headroom, and the effect of increased borrowing on liquidity.
- Whether the dividend and planned share repurchases remain supportable given operating losses and capital needs.
- Customer concentration, international sales exposure, deferred-tax-asset realizability, and the Centric Solutions facility transition.