Transcript
Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Optical Cable Corporation Third Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. Thank you. Mr. Palash, you may begin.
Great. Good morning, and thank you all for participating in Optical Cable Corporation's third quarter of fiscal year 2020 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'd like to turn the call over to Neil Wilkin. Neil, please begin.
Thank you, Aaron, and good morning, everyone. I will start today's call with some opening remarks. Tracy will then provide a detailed review of our third quarter results for the three-month and nine-month periods ending July 31, 2020. After her comments, we will address as many questions as possible. As usual, we will take questions only from analysts and institutional investors during the Q&A session, but we also invite other shareholders to submit questions in advance of the earnings call. Details for submitting questions are in our press release about the call's date and time. The year 2020 has been challenging for all of us. I want to express my gratitude to the OCC team for their ongoing commitment to following safety measures to keep our operations COVID-free. It is through this commitment, at work and at home, that we can continue to ensure everyone's health and safety. We have implemented several measures to protect our employees and their families, successfully mitigating the impact of COVID-19 on our workforce and operations, which have continued without interruption at our three locations, albeit at lower production volumes. As I noted during our second quarter conference call, OCC remains functional during the COVID-19 pandemic because our workforce is classified as essential by the U.S. Department of Defense and the U.S. Department of Homeland Security. We take this responsibility seriously, especially with tomorrow marking the 19th anniversary of September 11, reminding us of the significance of our role in supplying mission-critical products to the military, first responders, and essential workers, including healthcare facilities. This quarter, we have witnessed both the strength and resilience of our offerings, as strong demand from certain customers partially offset COVID-19-related sales declines in other industries. However, we have faced revenue decreases in many of our markets, particularly in specialty sectors, due to the pandemic's ongoing impact, leading to a 21.5% decrease in net sales for the third quarter of fiscal 2020 compared to the same period last year. Sequentially, net sales dropped 8.2% from the second quarter of the fiscal year. Despite these challenges, we have made substantial progress, benefiting from cost reductions, efficiencies, and improved production throughput at our Roanoke facility. We also enhanced our financial position by successfully refinancing our revolving credit facility with North Mill Capital during the third quarter. This new arrangement allows us access to a maximum of $18 million based on a working capital borrowing calculation, providing greater financial flexibility. OCC has a solid foundation and, as we've shown in the past, a resilient business model. We are well-positioned in our industry, focused on operational efficiency while continuing to serve our customers. We are confident that our competitive advantages, capabilities, and ongoing initiatives will drive future profitable growth, strengthen our market position, and enable us to effectively compete against larger competitors both now and during the post-pandemic recovery. Now, I'll hand the call over to Tracy Smith, who will further detail our financial results for the second quarter of fiscal 2020.
Thank you, Neil. Consolidated net sales for the third quarter of fiscal 2020 were $13.6 million, a decrease of 21.5% compared to net sales of $17.4 million for the third quarter of fiscal 2019. Net sales were negatively impacted during the third quarter of fiscal year 2020, due primarily to the economic effects of the COVID-19 pandemic. Consolidated net sales for the first nine months of fiscal 2020 were $41.4 million, a decrease of 22% compared to net sales of $53.1 million for the same period last year. The decrease in net sales during the first nine months of fiscal 2020 was primarily the result of the number of large orders from one customer in the wireless carrier market in the first nine months of fiscal year 2019 that did not recur at the same levels in the first nine months of fiscal year 2020. Net sales to this customer decreased $5.6 million in the first nine months of fiscal year 2020. Historically, net sales to this customer have been volatile from quarter-to-quarter and from year-to-year. We also believe net sales during the first nine months of fiscal year 2020 were negatively impacted by the COVID-19 pandemic, which ceased or significantly reduced operations of many businesses including OCC customers and suppliers. Turning to gross profit. Gross profit was $3.5 million in the third quarter of fiscal 2020 compared to $4.5 million in the third quarter of fiscal 2019. Gross profit margin, our gross profit as a percentage of net sales was 25.5% in the third quarter of fiscal 2020 compared to 25.9% in the third quarter of fiscal 2019. Gross profit was $9.9 million in the first nine months of fiscal 2020 compared to $13.4 million in the first nine months of fiscal 2019. Gross profit margin our gross profit as a percentage of net sales was 23.9% in the first nine months of fiscal 2020 compared to 25.2% in the first nine months of fiscal 2019. Gross profit margins tend to be higher when the company achieves higher net sales levels as certain fixed manufacturing costs are spread over higher sales. This operating leverage, which is beneficial at higher sales levels was the primary factor putting downward pressure on gross profit margin, during the third quarter and first nine months of fiscal year 2020, as fixed costs were spread over lower sales offsetting cost reductions and significant production throughput and efficiency improvements achieved principally in the company's Roanoke production facility. SG&A expenses decreased approximately $858,000 or 15.8% to $4.6 million during the third quarter of fiscal 2020 compared to $5.4 million for the same period last year. SG&A expenses as a percentage of net sales were 33.4% in the third quarter of fiscal 2020 compared to 31.2% in the third quarter of fiscal 2019. SG&A expenses decreased approximately $3 million or 16.9% to $14.9 million during the first nine months of fiscal 2020, compared to $18 million for the same period last year. SG&A expenses as a percentage of net sales were 36.1% in the first nine months of fiscal 2020 compared to 33.9% in the first nine months of fiscal 2019. The decrease in SG&A expenses during the third quarter and first nine months of fiscal 2020 compared to the same period last year was primarily the result of decreases in employee-related costs, including employee incentives and commissions and net reductions in other SG&A expenses as we focused on controlling costs. These decreases were partially offset by an increase in bad debt expense due to concerns about the collectibility of certain customer accounts during this unprecedented pandemic environment. OCC recorded a net loss of $1.4 million or $0.20 per basic and diluted share for the third quarter of fiscal 2020 compared to a net loss of $1.1 million or $0.15 per basic and diluted share for the third quarter of fiscal 2019. OCC recorded a net loss of $5.7 million or $0.78 per basic and diluted share for the first nine months of fiscal 2020, compared to a net loss of $5 million or $0.68 per basic and diluted share for the first nine months of fiscal 2019. On July 2020 OCC terminated its revolving credit note with Pinnacle Bank and along with our wholly-owned subsidiaries entered into a loan and security agreement with North Mill Capital. As part of the refinancing transaction, OCC also entered into a revolving credit master promissory note with North Mill that provided up to a maximum aggregate principal amount of $18 million with availability based on a working capital borrowing-based calculation. As of July 31, 2020, we had outstanding borrowings of $4.6 million on our revolving credit note and $2.2 million in available credit. We also had outstanding loan balances of $5.2 million under our real estate term loans and $5 million on our PPP loan. And with that, I'll turn the call back over to Neil.
Thank you, Tracy. And now if you have any questions we are happy to answer them. Maria, 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.
Thank you. And I'm showing no questions at this time. I'd like to turn the floor back over to Neil Wilkin for any additional or closing remarks.
Okay. Thank you, Maria. Aaron, we of course accept questions submitted in writing this morning prior to the call. I think we have received some questions. Could you go ahead and read those off and we'll respond to them please?
Yes. We have received a few questions. The first one is did OCC hire a new compensation consultant in 2020?
Okay. The short answer is no. As you all know, the independent compensation committee is who hires and utilizes a compensation consultant to assist them in setting CEO and CFO compensation. We use the same consultant that the compensation committee uses to provide data that we use in setting compensation levels for the remaining members of the leadership team. The compensation consultant we're currently using is still the same one that the compensation committee has used in the past. They do periodically consult with others and evaluate that and that's been done over the last couple of years, but there has not been a change, and OCC as always focuses on the design and compensation structures across the entire company that provides proper incentives based on hitting performance targets. If you have more questions about that, we describe a little bit in our proxy statements how we view compensation and how the compensation committee views compensation, and that should be a helpful reference.
Great. Next question does David Goode have a role with the company yet?
No, other than as an investor in the company. David Goode is a native of Roanoke. And of course, as the former Chairman and President of Norfolk Southern, he's always expressed an interest in Roanoke, as a region even when he left Roanoke. And has expressed an interest in OCC and we're proud to say that he's a shareholder and appreciate his investment.
Great. Do you expect to generate significant royalty income over the next several years?
Sure. We continue to place importance on our new product development and using patents to protect our innovations. We don't currently have licenses that are generating significant royalty income at this time. While we don't expect royalties to be a meaningful revenue stream in the near term, at this time I can't say whether it will become an increased source of revenue over the long term. We have been granted patents related to certain Cat8 enabling technology for connectors, which we believe will have future value for OCC and our products and possibly could generate license royalty revenue in the future.
Okay. Last question. Do you have a time line on when you will repurchase stock?
Sure. As is going to be noted in our 10-Q, which we expect to file later today, until further notice, the company has suspended repurchases and has no current plans to repurchase or retire shares. Given the current market environment including the uncertainty created by COVID-19, we really can't speculate about continuing our repurchase program right now.
That's it on the submitted questions.
Okay. Well, thank you, Aaron. I would like to thank everyone for listening to our third quarter conference call today. As always, we appreciate your time and your interest in Optical Cable Corporation. Hope you and your families continue to be safe. And we thank you for your time today.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect and have a wonderful day.