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OCC > SEC Filings for OCC > Form 10-Q on 15-Mar-2013All Recent SEC Filings

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Form 10-Q for OPTICAL CABLE CORP


15-Mar-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Form 10-Q may contain certain forward-looking information within the meaning of the federal securities laws. The forward-looking information may include, among other information, (i) statements concerning our outlook for the future, (ii) statements of belief, anticipation or expectation, (iii) future plans, strategies or anticipated events, and (iv) similar information and statements concerning matters that are not historical facts. Such forward-looking information is subject to known and unknown variables, uncertainties, contingencies and risks that may cause actual events or results to differ materially from our expectations, and such variables, uncertainties, contingencies and risks may also adversely affect Optical Cable Corporation and its subsidiaries (collectively, the "Company" or "OCC®"), the Company's future results of operations and future financial condition, and/or the future equity value of the Company. Factors that could cause or contribute to such differences from our expectations or risks that could adversely affect the Company include, but are not limited to, the level of sales to key customers, including distributors; timing of certain projects and purchases by key customers; the economic conditions affecting network service providers; corporate and/or government spending on information technology; actions by competitors; fluctuations in the price of raw materials (including optical fiber, copper, gold and other precious metals, and plastics and other materials affected by petroleum product pricing); fluctuations in transportation costs; our dependence on customized equipment for the manufacture of our products and our limited number of production facilities; our ability to protect our proprietary manufacturing technology; our ability to replace royalty income as existing patented and licensed products expire by developing and licensing new products; market conditions influencing prices or pricing; our dependence on a limited number of suppliers; the loss of or conflict with one or more key suppliers or customers; an adverse outcome in litigation, claims and other actions, and potential litigation, claims and other actions against us; an adverse outcome in regulatory reviews and audits and potential regulatory reviews and audits; adverse changes in state tax laws and/or positions taken by state taxing authorities affecting us; technological changes and introductions of new competing products; changes in end-user preferences for competing technologies, relative to our product offering; economic conditions that affect the telecommunications sector, the data communications sector, certain technology sectors and/or certain industry market sectors; economic conditions that affect certain geographic markets and/or the economy as a whole; changes in demand for our products from certain competitors for which we provide private label connectivity products; terrorist attacks or acts of war, and any current or potential future military conflicts; changes in the level of military spending or other spending by the United States government; ability to retain key personnel; inability to recruit needed personnel; poor labor relations; the impact of changes in accounting policies and related costs of compliance, including changes by the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), the Financial Accounting Standards Board (FASB), and/or the International Accounting Standards Board (IASB); our ability to continue to successfully comply with, and the cost of compliance with, the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 or any revisions to that act which apply to us; the impact of changes and potential changes in federal laws and regulations adversely affecting our business and/or which result in increases in our direct and indirect costs, including our direct and indirect costs of compliance with such laws and regulations; the impact of the Patient Protection and Affordable Care Act of 2010, the Health Care and Education Reconciliation Act of 2010, and any revisions to those acts that apply to us and the related legislation and regulation associated with those acts, which directly or indirectly results in increases to our costs; the impact of changes in state or federal tax laws and regulations increasing our costs and/or impacting the net return to investors owning our shares; the impact of future consolidation among competitors and/or among customers adversely affecting our position with our customers and/or our market position; actions by customers adversely affecting us in reaction to the expansion of our product offering in any manner, including, but not limited to, by offering products that compete with our customers, and/or by entering into alliances with, making investments in or with, and/or acquiring parties that compete with and/or have conflicts with our customers; voluntary or involuntary delisting of the


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Company's common stock from any exchange on which it is traded; the deregistration by the Company from SEC reporting requirements, as a result of the small number of holders of the Company's common stock; adverse reactions by customers, vendors or other service providers to unsolicited proposals regarding the ownership or management of the Company; the additional costs of considering and possibly defending our position on such unsolicited proposals; impact of weather or natural disasters in the areas of the world in which we operate, market our products and/or acquire raw materials; an increase in the number of shares of the Company's common stock issued and outstanding; economic downturns generally and/or in one or more of the markets in which we operate; changes in market demand, exchange rates, productivity, or market and economic conditions in the areas of the world in which we operate and market our products; and our success in managing the risks involved in the foregoing.

We caution readers that the foregoing list of important factors is not exclusive. Furthermore, we incorporate by reference those factors included in current reports on Form 8-K, and/or in our other filings.

Dollar amounts presented in the following discussion have been rounded to the nearest hundred thousand, except in the case of amounts less than one million and except in the case of the table set forth in the "Results of Operations" section, the amounts in which both cases have been rounded to the nearest thousand.

Overview of Optical Cable Corporation

Optical Cable Corporation (or OCC®) is a leading manufacturer of a broad range of fiber optic and copper data communication cabling and connectivity solutions primarily for the enterprise market, offering an integrated suite of high quality, warranted products which operate as a system solution or seamlessly integrate with other providers' offerings. Our product offerings include designs for uses ranging from commercial, enterprise network, datacenter, residential and campus installations to customized products for specialty applications and harsh environments, including military, industrial, mining and broadcast applications. Our products include fiber optic and copper cabling, fiber optic and copper connectors, specialty fiber optic and copper connectors, fiber optic and copper patch cords, pre-terminated fiber optic and copper cable assemblies, racks, cabinets, datacom enclosures, patch panels, face plates, multi-media boxes, and other cable and connectivity management accessories, and are designed to meet the most demanding needs of end-users, delivering a high degree of reliability and outstanding performance characteristics.

OCC® is internationally recognized for pioneering the design and production of fiber optic cables for the most demanding military field applications, as well as of fiber optic cables suitable for both indoor and outdoor use, and creating a broad product offering built on the evolution of these fundamental technologies. OCC also is internationally recognized for its role in establishing copper connectivity data communications standards, through its innovative and patented technologies.

Founded in 1983, Optical Cable Corporation is headquartered in Roanoke, Virginia with offices, manufacturing and warehouse facilities located in Roanoke, Virginia, near Asheville, North Carolina, and near Dallas, Texas. We primarily manufacture our fiber optic cables at our Roanoke facility which is ISO 9001:2008 registered and MIL-STD-790F certified, our enterprise connectivity products at our Asheville facility which is ISO 9001:2008 registered, and our military and harsh environment connectivity products and systems at our Dallas facility which is ISO 9001:2008 registered and MIL-STD-790F certified.

In Roanoke, the OCC team primarily designs, develops and manufactures fiber optic cables for a broad range of commercial and specialty markets and applications. We refer to these products as our fiber optic cable offering.


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In Asheville, the OCC team primarily designs, develops and manufactures fiber and copper connectivity products for the commercial market, including a broad range of commercial and residential applications. We refer to these products as our enterprise connectivity product offering.

In Dallas, the OCC team primarily designs, develops and manufactures a broad range of specialty fiber optic connectors and connectivity solutions principally for use in military and other harsh environment applications. We refer to these products as our applied interconnect systems product offering. We market and sell the products manufactured at our Dallas facility through our wholly owned subsidiary Applied Optical Systems, Inc. ("AOS") under the names Optical Cable Corporation and OCC by the efforts of our integrated OCC sales team.

Additionally, Optical Cable Corporation owns 70% of the authorized membership interests of Centric Solutions LLC ("Centric Solutions"). Centric Solutions is a business founded in 2008 to provide turnkey cabling and connectivity solutions for the datacenter market. Centric Solutions operates and goes to market independently from Optical Cable Corporation; however, in some cases, Centric Solutions may offer products from OCC's product offering.

Optical Cable Corporation, OCC®, Procyon, Superior Modular Products, SMP Data Communications, Applied Optical Systems, and associated logos are trademarks of Optical Cable Corporation.

Summary of Company Performance for First Quarter 2013

• Consolidated net sales for each of the first quarters of fiscal years 2013 and 2012 were $17.3 million, with net sales to customers outside of the United States increasing 23.4%, offset by a 9.1% decrease in net sales to customers in the U.S.

• Gross profit increased 6.1% to $6.5 million for the first quarter of fiscal year 2013 compared to $6.2 million for the same period last year.

• We reported net income attributable to OCC of $130,000, or $0.02 per share, during the first quarter of fiscal year 2013, compared to net income attributable to OCC of $192,000, or $0.03 per share, for the first quarter of fiscal year 2012.

• OCC increased its regular quarterly dividend rate to $0.02 per share per quarter, in December 2012, implying an annual dividend rate of $0.08 per share. OCC's Board of Directors decided to accelerate the declaration and payment of the first quarterly dividend for fiscal year 2013-which would normally be declared in January 2013 and paid in February 2013. This first quarterly dividend for fiscal year 2013 was declared and paid in December 2012.

• We also returned $543,000 in capital to shareholders through the repurchases of shares of OCC common stock during the first quarter of fiscal year 2013. OCC repurchased and retired 129,500 shares during the quarter.

Results of Operations

We sell our products internationally and domestically through our sales force to our customers, which include major distributors, regional distributors, various smaller distributors, original equipment manufacturers and value-added resellers. All of our sales to customers outside of the United States are denominated in U.S. dollars. We can experience fluctuations in the percentage of net sales to customers outside of the United States from period to period based on the timing of large orders, coupled with the impact of increases and decreases in sales to customers in the United States.


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Net sales consist of gross sales of products less discounts, refunds and returns. Revenue is recognized at the time of product shipment or delivery to the customer (including distributors) provided that the customer takes ownership and assumes risk of loss (based on shipping terms), collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Our customers generally do not have the right of return unless a product is defective or damaged and is within the parameters of the product warranty in effect for the sale.

Cost of goods sold consists of the cost of materials, product warranty costs and compensation costs, and overhead and other costs related to our manufacturing operations. The largest percentage of costs included in cost of goods sold is attributable to costs of materials.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix. Additionally, gross profit margins tend to be higher when we achieve higher net sales levels, as certain fixed manufacturing costs are spread over higher sales volumes.

Selling, general and administrative expenses ("SG&A expenses") consist of the compensation costs for sales and marketing personnel, shipping costs, trade show expenses, customer support expenses, travel expenses, advertising, bad debt expense, the compensation costs for administration and management personnel, legal and accounting fees, costs incurred to settle litigation or claims and other actions against us, and other costs associated with our operations.

Royalty income, net consists of royalty income earned on licenses associated with our patented products, net of royalty and related expenses.

Amortization of intangible assetsconsists primarily of the amortization of developed technology acquired in the acquisition of Superior Modular Products Incorporated, doing business as SMP Data Communications ("SMP Data Communications" or "SMP") on May 30, 2008, and the amortization of intellectual property and customer list acquired in the acquisition of AOS on October 31, 2009. Amortization of intangible assets is calculated using an accelerated method and the straight line method over the estimated useful lives of the intangible assets.

Other income (expense), net consists of interest expense and other miscellaneous income and expense items not directly attributable to our operations.

The following table sets forth and highlights fluctuations in selected line items from our condensed consolidated statements of income for the periods indicated:

                                            Three Months Ended
                                                January 31
                                                                         Percent
                                           2013             2012          Change

      Net sales                        $ 17,295,000     $ 17,334,000         (0.2 )%
      Gross profit                        6,524,000        6,150,000          6.1
      SG&A expenses                       6,189,000        5,965,000          3.8
      Net income attributable to OCC        130,000          192,000        (32.5 )

Net Sales

Consolidated net sales for each of the first quarters of fiscal years 2013 and 2012 were $17.3 million. We experienced an increase in net sales during the first quarter of fiscal year 2013 in our specialty markets compared to the same period last year, but this increase was offset by decreases in net sales in our commercial markets.


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Net sales to customers outside of the United States increased 23.4% in the first quarter of fiscal year 2013, compared to the same period last year, while net sales to customers in the United States decreased 9.1% in the first quarter of fiscal year 2013, compared to the same period last year.

Gross Profit

Our gross profit increased 6.1% to $6.5 million in the first quarter of fiscal year 2013, compared to $6.2 million in the first quarter of fiscal year 2012. Gross profit margin, or gross profit as a percentage of net sales, increased to 37.7% in the first quarter of fiscal year 2013 from 35.5% in the first quarter of fiscal year 2012.

Our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on both anticipated and unanticipated changes in product mix.

Selling, General, and Administrative Expenses

SG&A expenses increased 3.8% to $6.2 million during the first quarter of fiscal year 2013, compared to $6.0 million for the same period last year. SG&A expenses as a percentage of net sales were 35.8% in the first quarter of fiscal year 2013 compared to 34.4% in the first quarter of fiscal year 2012.

The increase in SG&A expenses during the first quarter of fiscal year 2013 compared to the same period last year was primarily due to increased employee related costs. Compensation costs increased in the first quarter of fiscal 2013 compared to the same period last year largely as a result of increases in employee headcount.

Royalty Income (Expense), Net

We recognized royalty expense, net of royalty income, totaling $48,000 during the first quarter of fiscal year 2013, compared to royalty income, net of royalty and related expenses, totaling $186,000 during the same period last year. The increase in royalty expense, net when comparing the two periods, is primarily due to the expiration of certain patents during fiscal year 2012, which had previously generated a large portion of our royalty income. The expired patents were acquired in our 2008 acquisition of SMP Data Communications. As a result, we expect the trend of royalty expense largely or completely offsetting royalty income to continue in fiscal year 2013. At the same time, we expect amortization expense associated with intangible assets to continue to decline as well.

Amortization of Intangible Assets

We recognized $23,000 of amortization expense, associated with intangible assets, for the first quarter of fiscal year 2013, compared to amortization expense of $33,000 during the first quarter of fiscal year 2012. The decrease in amortization expense, when comparing the two periods, is primarily due to the fact that the purchased developed technology asset, acquired in connection with the acquisition of SMP Data Communications on May 30, 2008, is being amortized using a declining balance method over the useful life of the asset; therefore, the amortization expense decreases as the asset ages and nears the end of its useful life.

Other Expense, Net

We recognized other expense, net of $112,000 in the first quarter of fiscal year 2013 compared to $145,000 in the first quarter of fiscal year 2012. Other expense, net is comprised of interest expense and other miscellaneous items which may fluctuate from period to period.


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Income Before Income Taxes

We reported income before income taxes of $151,000 for the first quarter of fiscal year 2013 compared to $192,000 for the first quarter of fiscal year 2012. This decrease was primarily due to the increase in SG&A expenses of $224,000 and the change in royalty income (expense), net of $234,000 in the first quarter of fiscal year 2013, partially offset by the increase in gross profit of $374,000, compared to the same period in 2012.

Income Tax Expense

Income tax expense totaled $40,000 in each of the first quarters of fiscal years 2013 and 2012. Our effective tax rate for the first quarter of fiscal year 2013 was 26.6% compared to 20.7% for the first quarter of fiscal year 2012.

Fluctuations in our effective tax rates are primarily due to permanent differences in U.S. GAAP and tax accounting for various tax deductions and benefits, but can also be significantly different from the statutory tax rate when income or loss before taxes is at a level such that permanent differences in U.S. GAAP and tax accounting treatment have a disproportional impact on the projected effective tax rate.

Net Income

Net income attributable to OCC for the first quarter of fiscal year 2013 was $130,000 compared to $192,000 for the first quarter of fiscal year 2012. This decrease was due primarily to the decrease in income before taxes of $41,000 in the first quarter of fiscal year 2013, compared to the same period in fiscal year 2012.

Financial Condition

Total assets decreased $1.5 million, or 3.1%, to $46.3 million at January 31, 2013, from $47.8 million at October 31, 2012. This decrease was primarily due to a $3.4 million decrease in trade accounts receivable, net partially offset by $996,000 increase in inventories and an $848,000 increase in property and equipment, net. The decrease in trade accounts receivable, net largely resulted from the decrease in net sales in the first quarter of fiscal year 2013 when compared to the fourth quarter of fiscal year 2012, as well as the timing of receipts of payments during the quarter and continued efforts to manage collections. The increase in inventories is largely due to efforts to support a wider variety of stocked products. The increase in property and equipment, net is due primarily to the addition of new manufacturing equipment at our fiber optic cable production facility.

Total liabilities decreased $1.0 million, or 5.7%, to $16.7 million at January 31, 2013, from $17.7 million at October 31, 2012. This decrease was primarily due to a $2.0 million decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes, largely due to the timing of related payments when comparing the two periods, partially offset by a $1.0 million increase in note payable to bank under our revolving line of credit.

Total shareholders' equity attributable to OCC at January 31, 2013 decreased $450,000 in the first quarter of fiscal year 2013. The decrease resulted from the repurchase and retirement of 129,500 shares of our common stock for $543,000 and dividends declared of $126,000, partially offset by net income attributable to OCC of $130,000 and share-based compensation, net of $50,000.

Liquidity and Capital Resources

Our primary capital needs during the first quarter of fiscal year 2013 have been to fund working capital requirements and capital expenditures, as well as the repurchase and retirement of shares of our common stock. Our primary source of capital for these purposes has been existing cash, borrowings under our revolving credit facility and cash provided by operations. As of January 31, 2013 and October 31, 2012, we had outstanding loan


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balances under our revolving credit facility of $2.0 million and $1.0 million, respectively. As of January 31, 2013 and October 31, 2012, we had outstanding loan balances, excluding our revolving credit facility, totaling $7.9 million and $8.0 million, respectively.

Our cash totaled $506,000 as of January 31, 2013, a decrease of $85,000, compared to $591,000 as of October 31, 2012. The decrease in cash for the three months ended January 31, 2013 resulted from capital expenditures totaling $1.5 million and net cash used in financing activities of $73,000, partially offset by net cash provided by operating activities of $1.5 million.

On January 31, 2013, we had working capital of $26.0 million compared to $26.8 million on October 31, 2012. The ratio of current assets to current liabilities as of January 31, 2013 was 5.4 to 1 compared to 4.4 to 1 as of October 31, 2012. The decrease in working capital was primarily due to the $3.4 million decrease in accounts receivable, net, partially offset by the $996,000 increase in inventories and the $2.0 million decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes. The improved ratio of current assets to current liabilities as of January 31, 2013 compared to October 31, 2012 was due to the fact that current assets decreased 8.0% while current liabilities decreased 24.9%.

Net Cash

Net cash provided by operating activities was $1.5 million in the first quarter of fiscal year 2013, compared to net cash used in operating activities of $176,000 in the first quarter of fiscal year 2012.

Net cash provided by operating activities during the first quarter of fiscal year 2013 primarily resulted from net income of $111,000 and certain adjustments to reconcile net income to net cash provided by operating activities, including depreciation, amortization and accretion of $495,000 and share-based compensation expense of $337,000. Additionally, decreases in accounts receivable of $3.4 million further contributed to net cash provided by operating activities. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by an increase in inventories of $996,000 and a decrease in accrued compensation and payroll taxes of $2.1 million.

Net cash used in operating activities during the first quarter of fiscal year 2012 primarily resulted from a $1.2 million increase in inventories and a $1.1 million decrease in accounts payable and accrued expenses, including accrued compensation and payroll taxes, partially offset by adjustments to reconcile net income to net cash used in operating activities, including depreciation, amortization and accretion of $551,000 and share-based compensation expense of $254,000. The aforementioned factors contributing to cash used in operating activities were further offset by a decrease in trade accounts receivable, net of $1.2 million.

Net cash used in investing activities totaled $1.5 million and $241,000 in the first quarters of fiscal year 2013 and 2012, respectively. Net cash used in investing activities during the first quarters of fiscal years 2013 and 2012 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.

Net cash used in financing activities totaled $73,000 and $220,000 in the first quarters of fiscal year 2013 and 2012, respectively. Net cash used in financing activities in the first quarter of fiscal year 2013 resulted primarily from the repurchase and retirement of 129,500 shares of our common stock for $543,000, payroll taxes withheld and remitted on share-based payments of $287,000 and the $222,000 payment of quarterly dividends previously declared in October 2012 and in December 2012, partially offset by proceeds from a note payable to our bank under our line of credit, net of repayments, of $940,000. Net cash used in financing activities in the first quarter of fiscal year 2012 resulted primarily from payroll taxes withheld and remitted on share-based payments of $106,000 and the $63,000 payment of quarterly dividends previously declared in October 2011.


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