Optical Cable Corporation — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2020; comparisons are to the corresponding 2019 periods. The company manufactures fiber-optic and copper data-communication cabling and connectivity products for enterprise, specialty, military, and wireless-carrier markets.
Financial performance
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $14.86 million, down 21.6% from $18.96 million | $27.75 million, down 22.3% from $35.71 million |
| Gross profit / margin | $4.00 million / 26.9%, versus $5.31 million / 28.0% | $6.40 million / 23.1%, versus $8.87 million / 24.8% |
| SG&A | $5.55 million, down 3.9%; 37.3% of sales versus 30.5% | $10.37 million, down 17.3%; 37.4% of sales versus 35.1% |
| Operating loss | $1.56 million, versus $475,000 | $4.01 million, versus $3.70 million |
| Net loss / diluted loss per share | $1.69 million / $0.23, versus $617,000 / $0.08 | $4.28 million / $0.58, versus $3.93 million / $0.53 |
| Cash from operations | Not separately reported for the quarter | Use of $816,000, versus use of $451,000 |
Q2 sales rose 15.3% sequentially from Q1 FY2020, and gross profit rose 66.2%. Management attributed lower margins year over year primarily to lower sales spreading fixed manufacturing costs over fewer units. Bad-debt expense was $452,000 for the first half, and the allowance for doubtful accounts increased to $552,000 from $100,000 at October 31, 2019.
Financial position and liquidity
- At April 30, cash was $4.29 million, compared with $537,000 at October 31, 2019. The increase primarily reflected the $4.98 million PPP loan and $350,000 of revolver advances.
- Working capital was $15.1 million and the current ratio was 2.1:1, versus $15.8 million and 2.2:1 at fiscal year-end.
- Operating activities used $816,000; investing activities used $104,000; financing activities provided $4.68 million. Cash capital expenditures were $81,000.
- Borrowings included $6.0 million under the revolver, $5.32 million of real-estate term debt, and the $4.98 million PPP loan. The revolver had $500,000 of availability and accrued interest at 3.75%. Term loans carry a 3.95% fixed rate.
- The unsecured PPP loan bears 1% interest and may be forgiven in whole or part if requirements are met. If not forgiven, monthly payments of $280,335 were scheduled to begin seven months after origination, with remaining principal and interest due April 15, 2022.
Material changes and management commentary
- Management attributed much of the year-over-year sales decline to one domestic customer: sales to that customer fell $2.9 million in Q2 and $5.2 million in the first half compared with 2019, following unusually large prior-year orders. Excluding this customer, Q2 sales declined 7.7%.
- Q2 enterprise and military sales increased year over year, but declines in wireless carrier and other specialty markets more than offset those gains. First-half enterprise and wireless-carrier sales declined, partly offset by increases in other specialty markets.
- Management said COVID-19 adversely affected demand, production volumes, operations, and access to capital; the company also experienced minor supply-chain disruption and delayed customer receipts. Facilities remained open as essential infrastructure but were operating at reduced production levels as of April 30.
- Management said cost reductions initiated in fiscal 2019 were producing savings and expected their benefits to be more fully realized as sales increased. No quantified sales or earnings guidance was provided.
- Management stated that cash, operating cash flow, and existing or additional financing should be adequate for at least the next 12 months. This assessment depends in part on financing access and uncertain pandemic and market developments.
Debt, risks, and unusual items
- The $6.5 million revolver was due to expire June 30, 2020. The company was seeking alternative financing and said it believed it could secure it by that date. An April 30 lender amendment removed the requirement to obtain a refinancing commitment by May 1.
- Lender amendments suspended the current-ratio and liabilities-to-tangible-net-worth covenants through April 30, 2020. The company reported compliance with other material covenants at that date. The filing describes underlying covenant thresholds that would otherwise apply, including a 3.0:1 minimum current ratio.
- Sales and cash receipts are exposed to customer order timing and concentration, competition, product mix, supply constraints, and economic conditions. COVID-19’s duration, severity, and effects on customers and markets were not predictable.
- Management said ordinary-course claims and legal matters were not expected to materially affect financial position, results, or liquidity. The company had a full valuation allowance against net deferred tax assets, limiting certainty about future tax benefits.
- After quarter-end, on May 14, the company granted restricted-stock awards of 58,880 shares to directors and a 25,000-share award to a consultant.
Most important facts for investors to verify
- Whether the revolver was renewed or replaced by its June 30, 2020 maturity, and the financing’s cost, terms, and covenant requirements.
- Whether the PPP loan qualified for forgiveness and the resulting repayment obligations.
- Subsequent sales, production, collections, and bad-debt experience, especially given the COVID-19 effects and increased receivables allowance.
- Whether sales recover from the prior-year large-order comparison and customer concentration, and whether gross margins improve as volume changes.
- Actual cash burn and liquidity relative to management’s 12-month adequacy assessment.