Optical Cable Corporation
Q4 2019 Earnings Call Transcript

Published: 27 Jan 2020

[Operator:]

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome you to the Optical Cable Corporation Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] Thank you.Mr. Palash, you may begin your conference.

[Aaron Palash:]

Great. Thank you. Good morning, and thank you all for participating on Optical Cable Corporation’s fourth quarter and fiscal year 2019 conference call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy.On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Senior Vice President and Chief Financial Officer.Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morning's press release. These cautionary statements apply to the content of the Internet webcast on www.occfiber.com as well as today's call.With that, I'll turn the call over to Neil Wilkin. Neil, please begin.

[Neil Wilkin:]

Thank you, Aaron, and good morning, everyone. I will begin the call today with a few opening remarks. Tracy will then review the fourth quarter and full-year results for the 3-month and 12-month periods ended October 31, 2019 and some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we will only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing in time of our call today.Before we get to the results, I want to take this opportunity to reflect on where OCC is as a company and why we believe OCC's future is so bright. Optical Cable Corporation is uniquely positioned in the fiber optic and copper cabling and connectivity industry with core strengths and capabilities which are valuable assets.For decades OCC used its core strengths and capabilities to grow sales and successfully compete against a host of much larger competitors by offering top-tier products and application solutions. Often OCC competes with different larger competitors in OCC's different targeted markets.OCC's core strengths and capabilities include

[Tracy Smith:]

Thank you, Neil. Consolidated net sales for fiscal year 2019 were $71.3 million, a decrease of 18.8% compared to net sales of $87.8 million for fiscal year 2018. Consolidated net sales for the fourth quarter of fiscal 2019 were $18.2 million, a decrease of 10% compared to net sales of $20.3 million for the fourth quarter of fiscal 2018.The decrease in net sales when comparing the fourth quarter and fiscal year 2019 year-over-year is a result of a number of large orders from one customer in the fourth quarter and fiscal year 2018 that did not recur at the same level in the fourth quarter and fiscal year 2019. Net sales to this customer decreased $2.6 million and $19.9 million respectively in the fourth quarter and fiscal year 2019.Consolidated net sales to all other customers increased 3.5% during the fourth quarter and increased 5.7% in fiscal year 2019 compared to the same period last year, excluding net sales from this one customer from all periods.Turning to gross profit. Gross profit was $18.3 million in fiscal year 2019 compared to $27.9 million in fiscal 2018. Gross profit margin or gross profit as a percentage of net sales was 25.7% in fiscal 2019 compared to 31.7% in fiscal 2018. Gross profit was $4.9 million in the fourth quarter of fiscal 2019 compared to $6.7 million in the fourth quarter of fiscal 2018. Gross profit margin was 27.1% in the fourth quarter of fiscal 2019 compared to 32.9% in the fourth quarter of fiscal 2018.During fiscal year 2019, we experienced significant reduction in gross profit margins primarily as a result of unintended throughput constraints and inefficiencies that experienced in our Roanoke production facility, particularly in the first quarter of the year. These throughput constraints and inefficiencies resulted from the expansion, training and restructuring of our manufacturing workforce and some changes during fiscal year 2018, initiatives intended to ultimately increase throughput and efficiency in order to meet increased product demand over the short and long-term.In 2019, we focused on cost control and correcting the impact of these unintended throughput constraints and inefficiencies that we experienced in our Roanoke facility, achieving improvements after the first quarter of fiscal year 2019. Our efforts to control costs and correct unintended inefficiencies are ongoing and we believe the benefits of some of the cost reductions and changes we’ve made and continue to make will be fully realized in fiscal year 2020.Our gross profit margins tend to be higher when we achieve higher net sales levels as certain fixed manufacturing costs are spread over higher sales. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis, which continue to be a factor putting downward pressure on our gross profit margin during the fourth quarter and fiscal year 2019.SG&A expenses decreased 10.3% to $23.4 million during fiscal 2019 compared to $26.1 million during fiscal year 2018. SG&A expenses decreased 19.7% to $5.5 million during the fourth quarter of fiscal 2019 compared to $6.8 million for the same period last year.The decrease in SG&A expenses during the fourth quarter and fiscal year 2019 compared to the fourth quarter and fiscal year 2018 was primarily the result of decreases in employee related costs, including employee incentives and share-based compensation. This can also be attributed to decreased net sales in our financial results during the fourth quarter and fiscal year 2019.OCC recorded a net loss of $5.7 million or $0.77 per basic and diluted share for fiscal 2019 compared to net income of $1.1 million or $0.14 per basic and diluted share for fiscal 2018. OCC recorded a net loss of $657,000 or $0.09 per basic and diluted share for the fourth quarter of fiscal 2019 compared to $350,000 or $0.05 per basic and diluted share for the fourth quarter of fiscal 2018.Subsequent to our fiscal quarter end, we entered into a loan modification agreement with our lender to modify our credit agreement. The purpose of the agreement was to reduce the aggregate outstanding balance under the credit agreement by $200,000 on or before April 15, 2020 by reducing the outstanding principal balances on our term loans; provide that all outstanding and future advances under the revolver accrue interest at an interest rate of prime lending rate plus .5% effective January 22, 2020; suspend the current ratio financial covenant for the fiscal quarter ended October 31, 2019; suspend the fixed charge coverage ratio for the fiscal year ended October 31, 2019; and provide that we engage in good faith to negotiate a letter of intent or similar expression of interest to refinance revolver by March 31, 2020 and enter into a financing commitment letter similar equity commitment or combination thereof, relating to financing by May 1, 2020 with closing plan on or before June 30, 2020.As of October 31, 2019, we had outstanding borrowings of $5.7 million on a revolving credit note and $850,000 in available credit. We also had outstanding loan balances of $5.9 million under our real estate term loan.With that, I'll turn the call back over to Neil.

[Neil Wilkin:]

Thank you, Tracy. Now if you have any questions, we're happy to answer them. Operator, if you could please indicate the instructions for our participants to call in any questions they may have, I would appreciate it. Again, we are only taking live questions from analysts and institutional investors.

[Operator:]

Thank you. [Operator Instructions] And I'm not showing any audio questions at this time. I'd like to turn the floor back over to Mr. Neil Wilkin.

[Neil Wilkin:]

Thank you. Aaron, are there any questions that were submitted by individual investors in advance to today's call?

[Aaron Palash:]

Yes, Neil. I do have a few questions submitted advance -- in advance of the call by non-institutional shareholders. I would be happy to read them off here.

[Neil Wilkin:]

Okay.

[Aaron Palash:]

So the first, congratulations on 5.7% growth in total net sales in core targeted markets in FY 2019. Do you expect similar growth in FY 2020?

[Neil Wilkin:]

While we are not -- we don’t provide any specific guidance. However, we have said this year and we’ve talked about it earlier on the call that we do expect sales for fiscal year 2020 in total to be higher than net sales for fiscal year 2019.

[Aaron Palash:]

Great. The second question, can you disclose your backlog or forward log as of October 31, 2019?

[Neil Wilkin:]

While as we've noted on the call already, we do expect that sales in the first quarter to be weaker, partly due to seasonality as we are seeing some delay in some pending projects from customers. And we also expect to see our net sales for the entire year to be higher than last year. I think that covers the question.

[Aaron Palash:]

Okay, great. Next question. At this point are the unintended throughput constraints and inefficiencies experienced in the Roanoke production facility largely in the past? Can you quantify the throughput improvements in efficiencies you expect and can you elaborate on the nature of the problems and when they will be fully solved?

[Neil Wilkin:]

Okay. There is a number of parts to be addressed there. I think that, first, while we haven't specifically separately quantified the impact, what we can say is that the impacts that we saw were reflected in our gross profit margin largely related to production at our Roanoke facility and those are reflected in our financials, and so you can see as you look from quarter-to-quarter and year-to-year the impact on the gross profit margin. We do believe that we’ve largely addressed the issues, but we do continue to focus on further improving our production efficiency and throughput. However, I think it is important to realize that OCC's operating leverage is significant. And so when sales volumes are lower, gross profit tends to be lower as fixed costs remain a factor. Similarly, when sales volumes are higher, gross profits tend to be higher as fixed costs are spread over higher sales. And so the percentage change in sales disproportionately impacts the percentage change in bottom line profitability.

[Aaron Palash:]

Okay. Next we’ve have a series of questions on the Pinnacle credit agreement. Has it been moved to special assets? In the press release, does the phrase refinancing the revolver by March 31, 2020 suggest refinancing with Pinnacle, or at a different financial institution? Similarly, would the borrowing portion of the commitment letter be through Pinnacle or at a different financial institution? And finally, can you talk about the equity commitment and what that means with respect to the issuance of OCC shares?

[Tracy Smith:]

I will take that one, Aaron. Pinnacle Bank has indicated their interest in OCC's securing an alternative source of financing to replace the revolving loans that OCC has with Pinnacle Bank, which is set to expire on June 30, 2020. We are in the process of seeking alternative financing sources for our revolving loan, and at this time, we are able to secure alternative financing for our revolving loan on or before June 30, 2020.

[Aaron Palash:]

Great. Last question. Do you expect to have an issue with any covenants at the end of Q1 fiscal year 2020?

[Tracy Smith:]

In our annual report filing that will be filed by tomorrow, we describe our covenants in more detail. We’ve a constructive relationship with our bank and they have been willing to work with us when we’ve had covenant violations, particularly since some of the violations have been created by the classification of the revolver balance as current as opposed to non-current which is how it was classified originally.

[Aaron Palash:]

Got it. That was the last question.

[Neil Wilkin:]

Are there any other questions? Then there is no other questions, Aaron?

[Aaron Palash:]

No. Good to go.

[Neil Wilkin:]

Okay. Well in closing, then I would like to thank -- first thank our team of dedicated employees who've worked tirelessly to overcome the challenges we had experienced this last year. I'm deeply grateful for the hard work and contributions and mindful that their efforts are essential to the success of our customers and to OCC. I would also like to thank everyone for listening to our fourth quarter and fiscal year 2019 conference call today. As always, we appreciate your time and your interest in Optical Cable Corporation. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.