OPTICAL CABLE CORP quarterly report, Q1 FY2015

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Optical Cable Corporation — Q1 FY2015 Form 10-Q

Reporting period: Three months ended January 31, 2015; comparative period is the three months ended January 31, 2014. Financial statements are unaudited.

Business context

OCC designs and manufactures fiber-optic and copper cabling and connectivity products for enterprise, commercial, military, industrial, and other specialty applications. It reports one principal segment, with Centric Solutions disclosed separately.

Financial performance and liquidity

  • Revenue: $17.36 million, up 5.0% year over year. U.S. sales increased 11.9%; sales outside the U.S. decreased 14.0%.
  • Gross profit and margin: $5.39 million, roughly flat year over year; margin declined to 31.0% from 32.7%, which management attributed primarily to product mix.
  • Operating results: Operating loss was $394,000 versus $677,000. OCC-attributable net loss improved to $228,000, or $0.04 per share, from $412,000, or $0.07 per share. Lower SG&A, down 5.4% to $5.72 million, was the main improvement cited.
  • Cash flow: Operating activities provided $743,000 versus $915,000. Investing activities used $954,000, mainly for property and equipment; financing activities used $190,000. Cash fell $401,000 to $689,000.
  • Balance sheet: Total assets were $46.0 million and total liabilities $16.3 million at January 31. Working capital was $25.3 million, and the current ratio was 5.5:1. Cash was $689,000; current assets were $30.9 million and current liabilities $5.6 million.
  • Debt: Revolving borrowings were $3.0 million, with $5.8 million of available credit. Real-estate term debt was $7.43 million, including current installments; the term loans carry a fixed 4.25% rate. The revolving facility rate was 2.37% at quarter-end and matures August 31, 2016.
  • Shareholder returns: The quarterly dividend was $0.02 per share. OCC repurchased and retired 79,036 shares for approximately $374,000, completing its 320,000-share repurchase plan.

Material changes versus the prior comparable period

  • Sales rose 5.0%, reflecting increased commercial-market sales, partly offset by lower specialty-market sales.
  • Gross profit was nearly unchanged despite higher sales, and gross margin contracted by 1.7 percentage points.
  • SG&A declined $325,000, primarily due to lower employee-related costs following reorganization initiatives in late FY2014.
  • OCC’s net loss narrowed by $184,000. The income-tax benefit decreased to $245,000 from $324,000; the effective tax rate was 49.3% versus 42.2%.
  • Operating cash flow decreased $172,000. The quarter’s cash generation benefited substantially from a $5.0 million reduction in receivables, partly offset by lower payables and accrued expenses and higher inventory.

Outlook, commentary, risks, and unusual items

  • Management expects cash from operations, cash on hand, and existing credit facilities to fund operations for at least the next 12 months.
  • FY2015 capital expenditures were budgeted at $5.5 million. OCC had spent approximately $565,000 on fiber-optic manufacturing equipment and committed an additional $2.4 million for these efforts at quarter-end. Management noted that actual spending has historically often been below budget.
  • Management described a historical pattern of relatively lower first-half and higher second-half sales, while cautioning that project timing and economic conditions can alter this pattern. No specific revenue or earnings guidance was provided.
  • Management identified risks including customer and project timing, industry and government spending, competition, product mix and pricing, raw-material and transportation costs, supplier concentration, technology changes, and economic conditions. Two customers represented 13.2% and 11.8% of quarterly sales, respectively.
  • Ordinary-course claims, legal actions, and regulatory reviews were disclosed; management did not expect their disposition to materially affect financial position, results, or liquidity.
  • The board was expected to consider a new share-repurchase plan during FY2015; no new plan was reported as approved. OCC adopted ASU 2013-11 with no material impact and was evaluating the future impact of the new revenue-recognition standard, ASU 2014-09.
  • Disclosure controls were reported effective as of January 31, 2015, with no material changes in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether sales growth and margin performance persist, particularly given the quarter’s product-mix effect and lower international sales.
  2. Whether the receivables-driven operating cash inflow is repeatable, and how inventory, payables, and accrued compensation affect future cash conversion.
  3. Progress and returns on the $2.4 million committed manufacturing-equipment spending and the $5.5 million FY2015 capital-expenditure budget.
  4. Availability and terms of revolving credit as borrowing increases, alongside low quarter-end cash and scheduled debt obligations.
  5. Whether the board approves a new repurchase plan and whether dividends remain sustainable if losses or cash demands continue.
  6. Customer concentration, seasonality, legal or regulatory developments, and the eventual effect of ASU 2014-09.