Optical Cable Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended April 30, 2013. The company manufactures fiber-optic and copper cabling and connectivity products for enterprise, commercial, military, industrial, and other specialty markets. Its statements are unaudited.
Financial results
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $19.1 million, down 13.3% from $22.1 million | $36.4 million, down 7.5% from $39.4 million |
| Gross profit / margin | $6.7 million / 34.9%, versus $8.9 million / 40.2% | $13.2 million / 36.2%, versus $15.0 million / 38.1% |
| Income from operations | $281,000, versus $1.5 million | $545,000, versus $1.9 million |
| Net income attributable to OCC | $42,000, or $0.01 per share, versus $949,000, or $0.15 | $172,000, or $0.03 per share, versus $1.1 million, or $0.18 |
| Operating cash flow | $1.6 million, versus $101,000 in the prior-year six-month period | |
| Capital spending and investing cash flow | $2.2 million in property and equipment purchases/deposits; net investing cash outflow was $2.3 million |
Q2 sales increased 10.6% sequentially from Q1 FY2013 sales of $17.3 million. SG&A declined 13.6% in Q2 and 5.8% for the half; the six-month SG&A-to-sales ratio rose to 34.6% from 34.0%. The filing does not provide a clear EBITDA value.
Financial position and liquidity
- At April 30, cash was $783,000, total assets $47.8 million, and working capital $26.9 million. The current ratio was 5.2:1, compared with 4.4:1 at October 31, 2012.
- Trade receivables were $10.5 million, down from $12.6 million; inventories were $19.5 million, up from $18.5 million.
- Outstanding revolving-credit borrowings increased to $3.0 million from $1.0 million; $3.0 million of credit remained available. Term debt was $7.9 million, bringing total borrowings to approximately $10.9 million. The real-estate loans carry a 4.25% fixed rate; the revolving facility matures May 31, 2014 and bears interest at the greater of LIBOR plus 2% or 3%.
- Operating cash flow benefited from a $2.2 million reduction in receivables, partly offset by a $1.0 million inventory increase and a $1.9 million reduction in accrued compensation and payroll taxes. Financing cash flow was $845,000, including net $2.0 million of revolving-credit proceeds, and cash increased $192,000.
Material changes and management commentary
- Management attributed lower sales primarily to approximately $4.8 million of large customer orders in Q2 2012 that did not recur at similar levels, along with continued weakness in certain global markets. U.S. sales fell 17.4% in Q2; international sales fell 1.8%. For the first half, U.S. sales fell 13.8%, while international sales rose 9.5%.
- Lower production volume reduced absorption of fixed manufacturing costs. Additional production costs and capacity were incurred at the Roanoke facility in anticipation of higher future demand from a customer. Management also cited product mix as a factor in margin variability.
- Management stated that patents that had generated significant royalty income expired in FY2012. It expected royalty expense to largely or completely offset royalty income during FY2013, while intangible-asset amortization was expected to continue declining.
- Centric Solutions, in which OCC owns 70%, generated Q2 revenue of $624,000 and operating income of $138,000; first-half revenue was $877,000 and operating income $60,000. It had recorded operating losses in the comparable 2012 periods.
Outlook, capital allocation, and risks
- No specific revenue or earnings forecast was provided. Management said cash on hand, operating cash flow, and existing credit facilities should be adequate to fund operations for at least the next 12 months.
- The FY2013 capital-expenditure budget was $3.8 million. Approximately $2.7 million was committed to manufacturing equipment at the fiber-optic cable facility, of which about $2.3 million had been spent by April 30. Management noted that actual capital spending has historically been below budget.
- The quarterly dividend was increased in December 2012 to $0.02 per share ($0.08 annualized). The company declared $0.04 per share for the first half. It repurchased and retired 129,500 shares for $543,000 during the half; no shares were repurchased in Q2. The repurchase plan authorized up to 320,000 shares, with 123,500 remaining as of April 30.
- Key risks identified include customer and project timing and concentration, economic and IT-spending conditions, competition and technology shifts, product mix and raw-material costs, supplier dependence, manufacturing capacity and equipment dependence, and the ability to replace royalty income. The company reported ordinary-course claims and reviews, which management did not expect to have a material adverse effect.
- Management concluded disclosure controls were effective as of April 30, 2013 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether anticipated customer demand materializes and supports the added manufacturing capacity and planned capital spending.
- Whether sales recover from the prior-year comparison, and whether gross margins improve as production volumes and product mix change.
- How the loss of royalty-generating patents affects future royalty income and expenses.
- Revolving-credit availability and borrowing levels, particularly given the facility’s May 2014 maturity and borrowing-base limits.
- Whether working-capital trends, including higher inventory and lower receivables, convert into sustainable operating cash flow.
- The sustainability of dividends and share repurchases relative to earnings, capital needs, and debt.