Optical Cable Corporation — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2018. Financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products, serving enterprise, wireless carrier, military, and other specialty markets.
Financial performance
| Metric | Three months ended Apr. 30, 2018 | Six months ended Apr. 30, 2018 | Prior-year comparable period |
|---|---|---|---|
| Net sales | $26.9 million | $44.4 million | $15.8 million / $30.5 million |
| Gross profit | $9.0 million | $14.2 million | $5.7 million / $10.5 million |
| Gross margin | 33.3% | 31.9% | 35.7% / 34.4% |
| Operating income (loss) | $1.56 million | $1.23 million | $(0.28) million / $(0.70) million |
| Net income (loss) | $1.39 million; $0.18/share | $0.98 million; $0.13/share | $(0.24) million; $(0.04)/share / $(0.85) million; $(0.13)/share |
Quarterly sales set a company record, increasing 69.7%; first-half sales rose 45.9%. Gross profit increased, but margin declined because of a shift toward lower-margin products. Higher sales helped spread fixed manufacturing costs. SG&A rose 25.5% in the quarter and 16.8% for the half, largely from employee-related costs, incentives, and commissions; SG&A as a share of sales fell in both periods. First-half results also benefited from lower net royalty expense following expiration of a licensed patent. The prior-year comparable periods included approximately $171,000 of income from a favorable legal settlement, affecting the comparison of other income/expense.
Cash, liquidity and debt
- At April 30, cash was $278,000, versus $891,000 at October 31, 2017. First-half operating cash flow was $(3.05) million, investing cash flow $(227,000), and financing cash flow $2.66 million. Operating cash use primarily reflected a $11.7 million increase in receivables and a $2.0 million increase in inventory, partly offset by higher payables and accrued expenses.
- Working capital was $25.9 million; the current ratio was 2.8:1, down from 6.5:1 at October 31. Current assets were $40.3 million and current liabilities $14.4 million.
- Total borrowings were approximately $15.2 million: $8.7 million under revolving facilities and $6.5 million of real-estate term loans. The $7.0 million working-capital revolver was fully drawn. The separate $6.0 million special-project line had $1.7 million drawn and $4.3 million available. The special-project line matures October 1, 2018 unless extended; the main revolver maturity was extended to September 30, 2019. Both revolving facilities are secured and cross-collateralized with real property.
- Management said cash on hand, operating cash flows, and existing credit facilities should fund operations for at least 12 months. It expected operating activities to provide cash in the second half as collections come in, but gave no assurance.
Business developments, outlook and risks
- Growth was driven particularly by wireless carrier and military markets; enterprise sales declined in the quarter and first half. A significant customer’s orders drove the sales increase and working-capital borrowing. That customer represented 47.7% of quarterly sales, 37.3% of first-half sales, and 61.2% of receivables at period-end.
- Backlog/forward load was $11.8 million at April 30, down from $14.8 million at January 31 and $19.0 million at the end of February. Management said it believed third-quarter sales would likely exceed the prior-year quarter but be below Q2 FY2018.
- OCC typically has higher sales in the second half, but said this pattern may not hold in FY2018 because significant sales to one customer were concentrated in the first half. Management cited order timing, customer concentration, market conditions, product mix, competition, raw-material costs, suppliers, and technology changes among risks.
- The company budgeted $2.0 million of capital expenditures for FY2018 and reported no material capital-expenditure commitments at April 30. The Tax Act reduced the statutory federal corporate rate; OCC remeasured deferred tax assets and its full valuation allowance by $1.3 million each, with no income-statement effect. Further adjustment was possible. Management reported ordinary-course claims and regulatory matters, but expected no material adverse effect.
Important facts for investors to verify
- Whether the major customer’s orders, sales concentration, and receivable balance remain elevated, and whether collections convert working capital into cash.
- Whether the special-project credit facility is extended or repaid at maturity, and compliance with the modified financial covenants.
- Whether the lower gross margin persists as product mix and sales volumes change, and whether management’s Q3 and second-half cash-flow expectations are achieved.
- Any year-end changes to the provisional tax accounting and valuation allowance, and the eventual balance-sheet impact of the upcoming lease accounting standard.
- Management stated disclosure controls were effective as of April 30, 2018, with no material change in internal control over financial reporting during the quarter.