Optical Cable Corporation — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014. Optical Cable manufactures fiber-optic and copper cabling and connectivity products for commercial, enterprise, military, and other specialty markets. Financial statements are unaudited.
Financial performance
| Metric | Three months ended April 30, 2014 | Six months ended April 30, 2014 |
|---|---|---|
| Net sales | $20.2 million, up 5.6% year over year | $36.7 million, up 0.8% |
| Gross profit / margin | $6.7 million / 33.0%, versus 34.9% | $12.1 million / 32.9%, versus 36.2% |
| Operating income (loss) | $(0.2) million, versus $0.3 million | $(0.9) million, versus $0.5 million |
| Net income (loss) attributable to OCC | $(0.14) million; $(0.02) per share, versus $0.04 million; $0.01 per share | $(0.56) million; $(0.09) per share, versus $0.17 million; $0.03 per share |
| Cash provided by operating activities | Not provided for the quarter | $0.41 million, versus $1.61 million |
For the six-month period, capital expenditures and equipment deposits were $0.87 million; investing cash outflow was $0.94 million. Cash declined $0.46 million to $0.29 million. The company paid $0.26 million in dividends and declared $0.04 per share for the first half.
Financial position and changes
At April 30, 2014, total assets were $47.5 million and total liabilities were $18.4 million. Working capital was $26.7 million, compared with $27.0 million at October 31, 2013; the current ratio declined to 4.8 from 6.6. Trade receivables rose $1.5 million to $11.5 million. Inventory was $18.5 million.
Borrowings included $3.0 million under the revolving facility and $7.6 million of real-estate term debt, for approximately $10.6 million in total debt. The revolver had $6.0 million available, a 2.35% rate at period-end, and an August 31, 2015 maturity. Term loans carried a fixed 4.25% rate. The revolver balance increased $0.5 million from October 31, 2013.
Second-quarter U.S. sales increased 14.1%, while sales outside the U.S. fell 14.3%. For the first half, U.S. sales rose 10.2% and non-U.S. sales fell 19.3%. Commercial-market growth was offset in part by lower specialty-market sales. A single customer accounted for 14.3% of quarterly sales and 10.4% of first-half sales, versus 10.2% for the prior-year quarter and no customer above 10% in the prior-year first half.
Management commentary, outlook, and risks
- Management attributed first-half margin pressure to lower first-quarter sales, which spread fixed manufacturing costs over less volume, and second-quarter sales mix. It said the second-quarter mix effect was not believed to indicate a trend, while noting product mix is difficult to predict.
- Higher legal and professional fees contributed to SG&A increases; management did not believe the increase signaled a general upward trend. Royalty expense is expected to largely or completely offset royalty income in FY2014 following expiration of patents on licensed products.
- No specific revenue or earnings guidance was provided. Management believes operating cash flow, cash on hand, and available credit will fund operations for at least the next 12 months. The FY2014 capital-expenditure budget was $2.8 million; $0.56 million had been spent on manufacturing equipment upgrades and a further $0.82 million was committed at April 30.
- The company cited seasonality, project timing, customer spending, competition, product mix, raw-material and transportation costs, supplier and customer concentration, technology changes, and economic conditions as factors that could affect results. Management stated ordinary-course claims, legal matters, and regulatory reviews were not expected to materially affect financial position, results, or liquidity.
- Centric Solutions, in which OCC owns 70%, reported first-half revenue of $0.56 million and an operating loss of $0.19 million, versus revenue of $0.88 million and operating income of $0.06 million in the prior-year period.
Most important facts for investors to verify
- Whether revenue growth continues and whether gross margins recover from the first-half decline.
- Whether cash generation improves, given operating cash flow fell to $0.41 million and cash ended at $0.29 million.
- How working-capital movements, especially receivables and payables, affect liquidity and use of the revolving facility.
- Whether the concentrated customer exposure, weaker non-U.S. sales, and Centric Solutions losses change materially.
- Progress, returns, and funding for planned manufacturing investment, alongside dividend payments and outstanding share-based awards.