Optical Cable Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; comparative period is the three months ended January 31, 2016. Financial statements are unaudited. OCC manufactures fiber-optic and copper cabling and connectivity products for enterprise, specialty, harsh-environment and wireless-carrier markets.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $14.61 million | $14.05 million | +4.0% |
| Gross profit / margin | $4.81 million / 32.9% | $3.50 million / 24.9% | Profit +37.3%; margin +8.0 percentage points |
| SG&A | $5.19 million | $5.09 million | +2.1% |
| Operating loss | $419,000 | $1.60 million | Improved |
| Net loss attributable to OCC | $616,000; $0.09 per share | $1.75 million; $0.28 per share | Loss narrowed |
| Operating cash flow | $(69,000) | $16,000 | Lower by $85,000 |
Gross-margin improvement was attributed primarily to a product-mix shift toward higher-margin products. U.S. sales rose 10.8%, while sales outside the U.S. fell 17.4%, which the company said continued to be affected by the strong U.S. dollar. Enterprise-market growth was partly offset by lower specialty-market sales. SG&A included approximately $125,000 of additional legal fees, partly offset by lower Centric Solutions costs.
Financial condition and liquidity
- At January 31, 2017, cash was $1.25 million, total assets $40.12 million, total liabilities $15.85 million and shareholders’ equity $24.27 million.
- Working capital was $21.7 million and the current ratio was 5.7:1, versus $22.2 million and 6.4:1 at October 31, 2016.
- Cash fell $633,000 during the quarter. Investing activities used $66,000, primarily for property and equipment; financing activities used $499,000, including $400,000 of revolving-credit repayments. Inventory increased $1.02 million and was a principal operating-cash use.
- Revolver borrowings were $4.6 million on a $7.0 million facility, leaving $2.4 million available. Term debt was $6.87 million, including $310,000 current; total borrowings were approximately $11.47 million. Real-estate loans bear interest at 3.75%; the revolver rate was 3.16% at quarter-end. The facilities are secured by company assets and real property.
- After quarter-end, on February 28, 2017, OCC extended the revolver maturity to March 31, 2019 and removed scheduled reductions in availability; the maximum facility remained $7.0 million.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said cash from operations, cash on hand and existing credit facilities should fund operations for at least the next 12 months. The FY2017 capital-expenditure budget was $2.0 million; no material commitments existed at quarter-end.
- Management cited typical seasonality, with sales generally higher in the second half, but cautioned that project timing, customer orders and economic conditions can alter this pattern. Quarterly margins are sensitive to product mix; copper-heavy hybrid cables generally have lower margins.
- One customer accounted for 16.5% of quarterly sales, up from 11.9% in the prior-year quarter. Other identified risks include competitive and market conditions, raw-material and transportation costs, supplier and customer concentration, foreign-exchange effects, and financing and debt-covenant considerations.
- OCC had a $2.4 million valuation allowance against net deferred tax assets established in FY2015; future tax rates and any realization of deferred tax benefits remain uncertain.
- Litigation with former AOS-related parties was pending. A court dismissed claims against Rosenberger without prejudice for lack of personal jurisdiction; OCC was considering refiling in Texas. Management did not expect the disputes to have a material adverse effect. Warranty claims expense was $47,855 versus $12,730 in the prior-year quarter; the warranty accrual was $85,000 at quarter-end.
- Management stated that disclosure controls were effective as of January 31, 2017 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the higher gross margin is sustainable or primarily a temporary product-mix benefit.
- Trends in U.S. versus international sales, the concentrated customer’s orders, and demand in specialty markets.
- Inventory levels and conversion to cash, given the quarterly inventory build and negative operating cash flow.
- Revolver availability, debt terms and covenants, and the effect of the post-quarter maturity extension and collateral provisions.
- Developments in the pending litigation, warranty claims and the deferred-tax valuation allowance.