Optical Cable Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 31, 2013; comparison is with the three months ended January 31, 2012 unless stated otherwise. The company manufactures fiber-optic and copper cabling and connectivity products for commercial, enterprise, military, industrial and other specialty markets. The interim financial statements are unaudited.
Financial results and position
| Metric | Q1 FY2013 / Jan. 31, 2013 | Prior comparable period / Oct. 31, 2012 |
|---|---|---|
| Net sales | $17.30 million | $17.33 million; down 0.2% |
| Gross profit / margin | $6.52 million / 37.7% | $6.15 million / 35.5% |
| Operating income | $264,000 | $337,000 |
| Net income attributable to OCC | $130,000; $0.02 per share | $192,000; $0.03 per share |
| Operating cash flow | $1.51 million | $(176,000) |
| Cash | $506,000 | $591,000 at Oct. 31, 2012 |
| Working capital / current ratio | $26.0 million / 5.4:1 | $26.8 million / 4.4:1 at Oct. 31, 2012 |
| Total assets / total liabilities | $46.3 million / $16.7 million | $47.8 million / $17.7 million at Oct. 31, 2012 |
| Debt | $7.94 million real-estate loans and $2.00 million revolving borrowings | $8.00 million real-estate loans and $1.00 million revolving borrowings at Oct. 31, 2012 |
SG&A rose 3.8% to $6.19 million, or 35.8% of sales versus 34.4%. The company recorded $48,000 of net royalty expense, compared with $186,000 of net royalty income a year earlier. Interest expense was $108,000, versus $144,000. Income tax expense was $40,000; the effective tax rate was 26.6%, compared with 20.7%.
Investing cash outflow was $1.52 million, primarily from property and equipment purchases and deposits; financing cash outflow was $73,000. Cash declined by $85,000. Receivables decreased $3.40 million during the quarter, while inventories increased $996,000. Capital expenditures were approximately $1.5 million in cash-flow reporting.
Material changes and capital allocation
- Sales were essentially flat overall, but international sales increased 23.4% while U.S. sales fell 9.1%. Specialty-market growth was offset by declines in commercial markets. International customers represented approximately 34% of sales, versus 27% a year earlier.
- Gross margin improved by 2.2 percentage points, but higher SG&A and the swing in royalty results contributed to lower pretax income and OCC-attributable earnings.
- Management attributed the royalty change principally to the expiration in FY2012 of patents acquired with SMP Data Communications. It expected royalty expense to largely or completely offset royalty income in FY2013; intangible amortization was expected to continue declining.
- The company repurchased and retired 129,500 shares for approximately $543,000, leaving 123,500 shares authorized for purchase under its buyback plan. It raised the quarterly dividend to $0.02 per share; $126,000 was declared in December and paid that month. Cash dividends paid during the quarter totaled $222,000, including previously declared dividends.
Outlook, liquidity, and risks
- 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. At quarter-end, the $6.0 million revolving facility had $2.0 million outstanding and $4.0 million available, subject to borrowing-base limits; it matured May 31, 2014.
- The company had committed approximately $2.7 million for manufacturing equipment at its fiber-optic cable facility and had spent approximately $1.9 million by January 31. Its FY2013 capital expenditure budget was $3.8 million; management said such spending has historically been below budget. The equipment is intended to support increased demand for fiber-optic cable products.
- Management described historical seasonality: sales generally tend to be lower in the first half and higher in the second half of the fiscal year, but project timing and economic conditions can alter the pattern. The filing provides no specific sales or earnings guidance.
- Disclosed risks include customer and project timing, telecommunications and IT spending, competition and pricing, raw-material and transportation costs, supplier and customer concentration, production-facility and equipment dependence, technology changes, and execution and personnel risks. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Ordinary-course claims, legal actions and regulatory reviews were disclosed; management did not expect their resolution to materially adversely affect financial position, results or liquidity. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting during the quarter.
Investor verification points
- Check whether international growth and the specialty-market mix continued, and whether U.S. commercial-market weakness persisted.
- Track gross-margin durability against product mix, rising SG&A, and the ongoing effect of expired patents on royalty income.
- Review the cash conversion and working-capital trend, particularly inventory levels, receivable collections and accrued compensation payments.
- Verify equipment spending, delivery and utilization against the $2.7 million commitment and $3.8 million annual budget, alongside borrowing needs and remaining credit availability.
- Monitor debt repayment and refinancing well before the revolving facility’s May 2014 maturity, as well as buybacks and dividends relative to cash generation.