Optical Cable Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; comparisons are with the three months ended January 31, 2011 unless noted. OCC manufactures fiber-optic and copper data-communications cabling and connectivity products. It reports one principal segment and owns 70% of Centric Solutions LLC.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 / comparison |
|---|---|---|
| Net sales | $17.33 million | $17.71 million; down 2.1% |
| Gross profit / margin | $6.15 million / 35.5% | $6.42 million / 36.3% |
| SG&A | $5.96 million | $5.98 million |
| Operating income | $337,000 | $497,000 |
| Net income attributable to OCC / diluted EPS | $192,000 / $0.03 | $402,000 / $0.06 |
| Consolidated net income | $153,000 | $339,000 |
| Operating cash flow | $(176,000) | $1.15 million |
| Cash at period end | $455,000 | $1.09 million at October 31, 2011 |
Gross profit fell 4.3%; lower gross profit was the primary reason pretax income and OCC-attributable earnings declined. Interest expense was $144,000. The quarterly dividend increased to $0.015 per share, from $0.01 a year earlier.
Balance sheet and liquidity
- At January 31, 2012, total assets were $44.0 million, total liabilities $16.1 million, and total shareholders’ equity $27.9 million.
- Working capital was $23.8 million; the current ratio was 4.3:1. Cash declined by $637,000 during the quarter.
- Total long-term debt was $8.14 million, including $193,000 current installments. The real-estate loans bear fixed interest of 5.85% and mature April 30, 2018.
- No revolving-credit borrowings were outstanding; approximately $6.0 million was available under the SunTrust facility, subject to its borrowing-base terms. A $41,124 trade letter of credit reduced availability.
- Investing cash use was $241,000, including $207,000 for property and equipment. Financing cash use was $220,000, including debt payments, share-related payroll taxes, and dividends.
Material changes, outlook, and risks
- Commercial-market sales rose, but specialty-market sales declined; international sales fell 6.3%. Management cited continuing economic weakness as a possible drag on sales. U.S. customers accounted for about 73% of sales.
- At the end of February, backlog was $7.2 million, or about five weeks of trailing-twelve-month sales, above the company’s usual $4–$5 million range. Management said it believed backlog could positively affect Q2 sales and earnings and that FY2012 sales and earnings would likely exceed FY2011. These are expectations, not quantified formal guidance.
- Management noted historical seasonality: sales have generally been lower in the first half and higher in the second half, though project timing and economic conditions can alter the pattern. It stated cash, expected operating cash flow, and credit facilities should fund operations for at least twelve months.
- Royalty income increased to $186,000 from $161,000, but certain related patents begin expiring in FY2012. Management expects royalty income to trend down beginning in Q2; amortization expense is also expected to decline.
- Inventory increased $1.2 million, principally to support a wider range of stocked products and reflecting raw-material purchase timing. Operating cash use also reflected lower payables and accrued compensation, partly offset by collections of receivables.
- Risks identified include customer and project concentration/timing, economic and IT spending conditions, competition and technology shifts, raw-material and transport costs, dependence on suppliers and manufacturing facilities, and litigation, regulatory, tax, and personnel risks.
- A long-running patent dispute involving subsidiary AOS was settled in November 2011 while on appeal. No party paid cash; the parties agreed AOS’s designs did not infringe, and both appeals were dismissed. Management said other ordinary-course claims were not expected to materially affect the company.
- The board authorized repurchase and retirement of up to 200,000 shares over an anticipated 12–24 months; no shares had been repurchased by January 31. FY2012 capital-expenditure budget was $2.5 million, with no material commitments reported at quarter-end.
Important facts for investors to verify
- Whether the elevated February backlog converts to sales and earnings, and whether management’s FY2012 expectation is borne out.
- Whether margin pressure, specialty-market weakness, and expected royalty declines persist.
- Cash generation and working-capital needs, particularly inventory growth, against the low cash balance and scheduled debt service.
- Availability and borrowing-base conditions of the revolving facility, and progress against the capital-expenditure budget.
- Effects of the 200,000-share repurchase authorization and higher quarterly dividend on liquidity and share count.