Optical Cable Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2014; interim financial statements are unaudited. OCC manufactures fiber-optic and copper data-communications cabling and connectivity products for commercial, enterprise, military, industrial, and other specialty markets.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $21.0 million | $19.6 million | $57.7 million | $56.0 million |
| Gross profit / margin | $7.34 million / 34.9% | $6.13 million / 31.3% | $19.41 million / 33.6% | $19.32 million / 34.5% |
| Operating income (loss) | $539,000 | ($101,000) | ($340,000) | $444,000 |
| Net income (loss) attributable to OCC | $292,000; $0.04/share | ($125,000); ($0.02)/share | ($263,000); ($0.04)/share | $48,000; $0.01/share |
| Operating cash flow | Not separately reported | Not separately reported | $1.87 million | $1.38 million |
Third-quarter sales rose 7.2% and gross profit increased 19.7%; the nine-month sales increase was 3.0%, while gross profit was nearly flat. SG&A increased 9.8% in Q3 and 4.8% for nine months. The nine-month operating loss and OCC-attributable net loss contrasted with prior-year operating income and net income. Gross margins are affected by product mix and factory utilization.
Financial position and liquidity
- At July 31, cash was $470,000, total assets $47.3 million, and working capital $26.4 million; the current ratio was 4.9:1. Cash declined $280,000 from October 31, 2013.
- Operating cash flow of $1.87 million was offset by $1.92 million of investing outflows, primarily $1.81 million for property and equipment and $109,000 for intangible assets. Financing used $227,000.
- Debt comprised $3.0 million drawn on the revolving facility and $7.56 million of real-estate term loans, or approximately $10.56 million total. The revolver had $6.0 million available at July 31; its rate was 2.35%. Term loans carry a fixed 4.25% rate.
- On August 11, 2014, OCC extended the revolving loan maturity to August 31, 2016; other terms remained unchanged. Management said cash on hand, operating cash flow, and credit facilities should fund operations for at least 12 months.
- The quarterly dividend remained $0.02 per share. OCC paid $401,000 of dividends during the nine months and repurchased 13,400 shares for approximately $56,000 during Q3.
Material changes, outlook, and risks
- Q3 growth was helped by $3.5 million of sales from large orders for one customer, versus $1.6 million in the prior-year quarter. That customer represented 16.8% of Q3 sales and 12.7% of nine-month sales, increasing customer-concentration exposure.
- U.S. sales rose 18.0% in Q3 and 13.1% for nine months; sales outside the U.S. declined 22.4% and 20.3%, respectively. Commercial-market growth was partly offset by declines in specialty markets.
- At the end of August, backlog/forward load was $9.2 million, about 6–7 weeks of sales versus a typical $5–6 million or 3–4 weeks. Management said this elevated backlog made a positive Q4 sales impact likely; this was not quantified formal guidance.
- OCC eliminated positions as part of operational streamlining. Related nonrecurring costs were $138,000 in Q3 and $364,000 for nine months. Management estimated approximately $1.0 million in annual prospective savings from these and earlier position reductions.
- Capital expenditures were budgeted at $2.8 million for FY2014; approximately $1.2 million had been spent on manufacturing equipment upgrades through July 31. No material capex commitments were reported.
- Management cited risks including order timing and key-customer dependence, economic and IT spending conditions, competition and technology shifts, raw-material and transport costs, supplier concentration, and execution of plans. Ordinary-course legal and regulatory matters were not expected by management to have a material adverse effect. Disclosure controls were considered effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the elevated August backlog converted to Q4 sales, and how much sales growth depended on the large customer orders.
- Whether the projected $1.0 million annual cost savings materialize and offset higher SG&A and reorganization expenses.
- Whether gross-margin pressure and the nine-month operating loss improve as sales mix and production levels change.
- Revolver availability and borrowing-base capacity, debt service needs, and liquidity relative to planned capital spending and dividends.
- Customer concentration, falling international sales, and the status of warranty, legal, and other contingencies.