Optical Cable Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; unaudited. The company manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $14.05 million | $17.36 million |
| Gross profit / margin | $3.50 million / 24.9% | $5.39 million / 31.0% |
| SG&A expenses | $5.09 million | $5.72 million |
| Operating loss | $1.60 million | $394,000 |
| Net loss attributable to OCC | $1.75 million; $0.28 per share | $228,000; $0.04 per share |
| Cash provided by operating activities | $16,000 | $743,000 |
| Cash used in investing activities | $312,000 | $954,000 |
Sales declined 19.1% year over year, while gross profit fell 35.0%. SG&A decreased 11.1%, but rose to 36.2% of sales from 33.0% because revenue fell faster. Income tax expense was $24,000, versus a $245,000 benefit in the prior-year quarter; the company reported a negative 1.4% effective tax rate. It had established a $2.4 million valuation allowance against net deferred tax assets in FY2015.
Financial position and liquidity
- At January 31, 2016, cash was $539,000, total assets $42.2 million, and shareholders’ equity $24.3 million. Working capital was $21.8 million; the current ratio was 5.5:1.
- Debt comprised $6.0 million outstanding under the revolving bank facility and $7.16 million of real-estate term loans, or approximately $13.16 million total. The term loans carry a fixed 4.25% rate; the revolver rate was 3.18% at quarter-end.
- Revolver availability was $1.6 million, down from $2.5 million at October 31, 2015. The facility’s maturity is August 31, 2017.
- Cash decreased $544,000 during the quarter. Capital expenditures were $300,000; financing activities used $248,000, including $141,000 paid for previously declared dividends.
Material changes, outlook and risks
- Management attributed weaker sales to continued macroeconomic weakness in oil-and-gas and mining markets, a strong U.S. dollar affecting international sales, and pricing pressure, particularly in the wireless-carrier market. Sales fell in both enterprise and specialty markets; international sales declined 11.0%.
- Lower sales volumes, product mix and sales of lower-margin products contributed to the gross-margin decline. Management said specialty markets generally carry higher margins.
- Cost reductions included personnel actions expected to save approximately $1.0 million annually beginning in FY2016. Management expects savings to be more fully reflected later in the year. Centric Solutions also moved into OCC’s Dallas-area facility after its lease expired, reducing rent and staffing costs.
- On January 25, 2016, OCC obtained lender waivers for debt-service-coverage covenant noncompliance for the quarters ended October 31, 2015 and January 31, 2016. The covenant was replaced with an interest-coverage covenant: 1.25:1 for Q2 FY2016 and 1.50:1 for Q3 and Q4. Management estimated at least approximately $150,000 of pretax earnings would be needed to meet the Q2 requirement and cautioned there is no assurance of future compliance.
- The loan modifications increased the revolver spread from LIBOR plus 2.20% to LIBOR plus 2.75%, imposed $25,000 and $10,000 waiver fees, and restricted certain capital expenditures, additional indebtedness, dividends and stock repurchases.
- Management believed cash, operating cash flow and existing or potential credit facilities would fund operations for at least 12 months. This is qualified by the covenant-compliance risk and limited revolver availability. FY2016 capital expenditures were budgeted at $1.8 million; there were no material commitments at quarter-end.
- Management cited historical seasonality, with sales generally lower in the first half and higher in the second half, but said project timing and economic conditions can disrupt the pattern. Risks also include customer and supplier concentration, raw-material and transportation costs, competition, technology changes, market demand and access to financing. Management did not expect ordinary-course legal, claims or regulatory matters to materially affect financial position, results or liquidity.
- Disclosure controls were assessed as effective at January 31, 2016; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether OCC meets the new interest-coverage covenant, particularly the Q2 FY2016 earnings threshold, and whether lenders grant further relief if needed.
- Whether the announced cost savings are realized and improve gross profit and operating results as management expects.
- Whether sales and margins stabilize in oil-and-gas, mining, enterprise and wireless-carrier markets, given ongoing pricing and currency pressures.
- Cash generation, borrowing availability and compliance with loan restrictions, including limits affecting capital spending, dividends and repurchases.
- The filing’s MD&A states Q1 FY2016 “other expense, net” was $150,000, while the financial statements report $140,211; confirm the intended figure. The statements report no dividend declared in either comparative quarter, while cash-flow discussion says $141,000 was paid for dividends previously declared.