Optical Cable Corporation (OCC) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2015; comparative periods ended April 30, 2014. The financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products, primarily for enterprise and specialty markets.
Financial performance
| Metric | Quarter ended Apr. 30, 2015 | Quarter ended Apr. 30, 2014 | Six months ended Apr. 30, 2015 | Six months ended Apr. 30, 2014 |
|---|---|---|---|---|
| Net sales | $18.7 million | $20.2 million | $36.0 million | $36.7 million |
| Gross profit | $5.7 million | $6.7 million | $11.1 million | $12.1 million |
| Gross margin | 30.4% | 33.0% | 30.7% | 32.9% |
| Operating loss | $842,000 | $203,000 | $1.24 million | $880,000 |
| Net loss attributable to OCC | $490,000 ($0.08/share) | $143,000 ($0.02/share) | $718,000 ($0.12/share) | $555,000 ($0.09/share) |
| Operating cash flow | Not presented for the quarter | $350,000 | $406,000 |
Quarterly sales declined 7.5% year over year; first-half sales declined 1.9%. SG&A fell 5.3% in both comparisons, but lower gross profit drove larger operating and net losses. Management attributed margin pressure to sales mix, including increased sales of products with lower margins. Commercial-market sales increased, offset by decreases in specialty markets.
Financial position, cash flow and capital
- At April 30, 2015, cash was $668,000, down from $1.09 million at October 31, 2014. Working capital was $26.6 million and the current ratio was 5.1 to 1.
- Operating activities provided $350,000 in the first half. Investing activities used $1.86 million, principally for property and equipment; financing activities provided $1.08 million. Capital expenditures and deposits totaled $1.79 million.
- Total debt was approximately $11.9 million: $4.5 million drawn on the revolving facility and $7.36 million in real-estate term loans. The revolving facility had $4.5 million of availability at period-end. Term loans carry a fixed 4.25% rate; the revolving loan rate was 2.38% at April 30.
- On May 7, 2015, OCC extended the revolving facility maturity to August 31, 2017; other terms remained unchanged. This occurred after quarter-end.
- OCC declared dividends of $0.02 per share quarterly, or $0.04 per share in the first half. It repurchased 79,036 shares for $374,000 during the first half. Shares outstanding were 7,083,052 at April 30.
Changes, outlook and risks
- U.S. sales rose 3.5% in the first half, while sales outside the U.S. fell 17.7%; international sales represented about 21% of first-half revenue. In the quarter, U.S. sales fell 3.1% and international sales fell 21.1% year over year.
- OCC budgeted $5.5 million of capital expenditures for fiscal 2015. It had spent approximately $676,000 on manufacturing equipment upgrades and had committed a further $2.0 million as of April 30. Management said funding would come from working capital or credit facilities and historically spending has often been below budget.
- Management believes cash, operating cash flow and existing credit facilities will be adequate for at least the next 12 months. It expects sales typically to be stronger in the second half due to customer construction and budget cycles, but cautions that projects, orders and economic conditions can disrupt seasonality. No specific revenue or earnings guidance is provided.
- Risks highlighted include customer and project timing, weaker specialty or international demand, product mix and pricing, raw-material and transportation costs, competition and technology shifts, supplier/customer concentration, and broader economic conditions. Two customers each accounted for approximately 14%–15% of second-quarter sales.
- Management expects royalty expense to largely or fully offset royalty income in fiscal 2015 as licensed-product patents expire. Warranty accrual was $150,000 at April 30, versus $100,000 at October 31. Ordinary-course legal and regulatory matters were not expected by management to materially affect the company.
- Management reported disclosure controls were effective as of April 30, 2015, with no material change in internal control over financial reporting during the quarter. New revenue-recognition and debt-issuance-cost accounting standards were under evaluation.
Key facts for investors to verify
- Whether weaker specialty-market and international sales, and lower-margin product mix, persist or improve.
- Whether the company can restore gross margins and operating profitability while maintaining its dividend.
- How the $2.0 million committed equipment spending and fiscal-year capex budget affect cash, borrowing needs and returns.
- Revolver availability under the borrowing-base limits, covenant compliance and debt-service capacity; the filing does not state a specific covenant headroom value.
- Customer concentration, the impact of seasonality and project timing, and progress against management’s 12-month liquidity assessment.