Optical Cable Corp: Form 10-Q for the period ended Jul 31, 2012

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 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; 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 Company’s capital 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 capital 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 the Company’s capital stock issued and outstanding; economic downturns and/or 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.

Our Roanoke 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.

Our Asheville 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.

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

Summary of Company Performance for Third Quarter and first nine months of Fiscal Year 2012

• Consolidated net sales for the third quarter of fiscal year 2012 were $22.0 million, an increase of 17.2% when compared to consolidated net sales of $18.8 million for the same period last year. Consolidated net sales for the nine months ended July 31, 2012 increased 14.4% to $61.4 million, compared to consolidated net sales of $53.7 million for the nine months ended July 31, 2011.
• Gross profit increased 35.0% to $8.8 million for the third quarter of fiscal year 2012 compared to $6.5 million for the same period last year. Gross profit increased 26.1% to $23.8 million for the first nine months of fiscal year 2012 compared to $18.9 million for the same period last year.
• Gross profit margin (gross profit as a percentage of net sales) increased to 39.9% during the third quarter of fiscal year 2012, compared to 34.7% during the same period last year. Gross profit margin improved to 38.8% during the first nine months of fiscal year 2012, compared to 35.2% for the nine months ended July 31, 2011.
• Net income attributable to OCC during the third quarter of fiscal year 2012 was almost ten times the net income attributable to OCC reported during the third quarter of fiscal year 2011. Net income attributable to OCC was $1.2 million, or $0.18 per share, during the third quarter of fiscal year 2012, compared to $118,000, or $0.02 per share, for the comparable period last year. Net income attributable to OCC during the first nine months of fiscal year 2012 was more than 5 times the net income attributable to OCC reported during the comparable period for fiscal year 2012. We reported net income attributable to OCC of $2.3 million, or $0.36 per share, during the first nine months of fiscal year 2012, compared to $430,000, or $0.07 per share, for the comparable period last year.
• SG&A expenses as a percentage of net sales were 31.4% in the third quarter of fiscal year 2012—the lowest quarterly percentage for OCC in more than five years, and an indicator of OCC’s operating leverage and OCC’s continued focus on operating efficiently and effectively.

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.

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 assets consists primarily of the amortization of developed technology acquired in the acquisition of SMP Data Communications 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 operations for the periods indicated:

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Three Months Ended July 31, 2012 and 2011

Net Sales

Consolidated net sales for the third quarter of fiscal year 2012 increased 17.2% to $22.0 million compared to net sales of $18.8 million for the same period last year. Our increase in net sales during the third quarter of fiscal year 2012 was attributable to increased sales of our fiber optic cable products. Net sales in our commercial markets increased compared to the same period last year, but this increase was partially offset by decreases in net sales in our specialty markets. Net sales to customers in the United States increased 10.8% in the third quarter of fiscal year 2012 compared to the same period last year, and net sales to customers outside of the United States increased 39.1%.

The primary reason for the increase in net sales during the third quarter of fiscal year 2012 is due to the fact that we recognized net sales totaling, in the aggregate, approximately $5.1 million as the result of a number of large orders for two customers.

After the end of the third quarter of this year, sales order backlog/forward load was again high—particularly for our fiber optic cable products as the result of the new business generated by these two customers. Generally, OCC’s consolidated sales order backlog/forward load varies throughout the year between approximately 3 to 4 weeks of net sales, or approximately $4.0 million to $5.0 million. At the end of August 2012, our sales order backlog/forward load was $8.9 million, or approximately 5 to 6 weeks of net sales (on a trailing 12 month basis). As a result of our elevated sales order backlog/forward load, at this time, we believe it is likely we will see a positive impact on net sales and earnings during the fourth quarter of fiscal year 2012 similar to what we experienced during the second and third quarters of fiscal year 2012.

Gross Profit

Our gross profit increased 35.0% to $8.8 million in the third quarter of fiscal year 2012, compared to $6.5 million in the third quarter of fiscal year 2011. Gross profit margin, or gross profit as a percentage of net sales, increased to 39.9% in the third quarter of fiscal year 2012 from 34.7% in the third quarter of fiscal year 2011.

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, our gross profit margins for our product lines tend to be higher when we achieve higher net sales levels (as we did during the third quarter of fiscal year 2012 for our fiber optic cable products), as certain fixed manufacturing costs are spread over higher sales volumes.

Selling, General, and Administrative Expenses

SG&A expenses as a percentage of net sales were 31.4% in the third quarter of fiscal year 2012 compared to 33.2% in the third quarter of fiscal year 2011. The lower percentage in the third quarter of fiscal year 2012 relates to the fact that net sales increased $3.2 million when comparing the third quarter of fiscal year 2012 to the same period last year, while SG&A expenses only increased $671,000. Overall, SG&A expenses increased 10.8% to $6.9 million during the third quarter of fiscal year 2012, compared to $6.2 million for the same period last year.

The increase in SG&A expenses during the third quarter of fiscal year 2012 compared to the same period last year was primarily due to increased employee related costs and shipping costs. Compensation costs have increased when comparing the third quarter of fiscal 2012 to the comparable period in fiscal year 2011 largely as a result of increases in commissions and employee incentives due to increased net sales and the financial results during the third quarter of fiscal year 2012. Shipping costs also increased as net sales increased.

Royalty Income, Net

We recognized royalty income, net of royalty and related expenses, totaling $22,000 during the third quarter of fiscal year 2012, compared to royalty income, net of royalty and related expenses, totaling $247,000 during the same period last year. The decrease in royalty income, net, when comparing the two periods, is primarily due to the expiration of certain patents during the second quarter of fiscal year 2012, which had previously generated a large portion of our royalty income. As a result, we expect to see the trend of declining royalty income continue during the remainder of fiscal year 2012, and we expect amortization of intangible assets expense to continue to decline as well.

Royalty income, net is offset by the expense of the amortization of the intangible assets associated with our royalty income, net (as further described in the Amortization of Intangible Assets section included herein), resulting from the required write-up of intangible assets to fair value when acquired as part of the acquisition of SMP Data Communications on May 30, 2008.

Amortization of Intangible Assets

We recognized $34,000 of amortization expense, associated with intangible assets, for the third quarter of fiscal year 2012, compared to amortization expense of $108,000 during the third quarter of fiscal year 2011. 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, 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 in the third quarter of fiscal year 2012 of $145,000 compared to $168,000 in the third quarter of fiscal year 2011. Other expense, net is comprised of interest income, interest expense and other miscellaneous items which may fluctuate from period to period.

Income Before Income Taxes

We reported income before income taxes of $1.7 million for the third quarter of fiscal year 2012 compared to $252,000 for the third quarter of fiscal year 2011. This increase was primarily due to the increase in gross profit of $2.3 million in the third quarter of fiscal year 2012, partially offset by the increase in SG&A expenses of $671,000, compared to the same period in 2011.

Income Tax Expense

Income tax expense totaled $554,000 in the third quarter of fiscal year 2012 compared to $178,000 for the same period in fiscal year 2011. Our effective tax rate for the third quarter of fiscal year 2012 was 32.0% compared to 70.7% for the third quarter of fiscal year 2011.

Generally, 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 as was the case in the third quarter of fiscal year 2011.

Net Income

Net income attributable to OCC for the third quarter of fiscal year 2012 was $1.2 million compared to $118,000 for the third quarter of fiscal year 2011. This increase was due primarily to the increase in income before taxes of $1.5 million, partially offset by the increase in income taxes of $376,000, in the third quarter of fiscal year 2012, compared to the same period in fiscal year 2011.

Nine Months Ended July 31, 2012 and 2011

Net Sales

Consolidated net sales for the first nine months of fiscal year 2012 increased 14.4% to $61.4 million compared to net sales of $53.7 million for the same period last year. Our increase in net sales during the first nine months of fiscal year 2012 was attributable to increased sales of our fiber optic cable products. We experienced an increase in net sales during the first nine months of fiscal year 2012 in our commercial markets compared to the same period last year, but this increase was partially offset by decreases in net sales in our specialty markets. Net sales to customers in the United States increased 10.5% in the first nine months of fiscal year 2012 compared to the same period last year, and net sales to customers outside of the United States increased 26.5%.

The primary reason for the increase in net sales during the first nine months of fiscal year 2012 was due to the fact that we recognized net sales totaling, in the aggregate, approximately $11.0 million as the result of a number of large orders for two customers.

After the end of the third quarter of this year, sales order backlog/forward load was again high—particularly for our fiber optic cable products as the result of the new business generated by these two customers. Generally, OCC’s consolidated sales order backlog/forward load varies throughout the year between approximately 3 to 4 weeks of net sales, or approximately $4.0 million to $5.0 million. At the end of August 2012, our sales order backlog/forward load was $8.9 million, or approximately 5 to 6 weeks of net sales (on a trailing 12 month basis). As a result of our elevated sales order backlog/forward load, at this time, we believe it is likely we will again see a positive impact on net sales and earnings during the fourth quarter of fiscal year 2012 similar to what we experienced during the second and third quarters of fiscal year 2012.

Gross Profit

Our gross profit increased 26.1% to $23.8 million in the first nine months of fiscal year 2012, compared to $18.9 million in the first nine months of fiscal year 2011. Gross profit margin, or gross profit as a percentage of net sales, increased to 38.8% in the first nine months of fiscal year 2012 from 35.2% in the first nine months of fiscal year 2011.

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, our gross profit margins for our product lines tend to be higher when we achieve higher net sales levels (as we achieved during the first nine months of fiscal year 2012 for our fiber optic cable products), as certain fixed manufacturing costs are spread over higher sales volumes.

Selling, General, and Administrative Expenses

SG&A expenses as a percentage of net sales were 33.0% in the first nine months of fiscal year 2012 compared to 34.1% in the first nine months of fiscal year 2011. The lower percentage in the first nine months of fiscal year 2012 relates to the fact that net sales increased $7.7 million when comparing the first nine months of fiscal year 2012 to the same period last year, while SG&A expenses only increased $2.0 million. SG&A expenses increased 10.9% to $20.3 million for the first nine months of fiscal year 2012 from $18.3 million for the same period last year.

The increase in SG&A expenses during the first nine months of 2012 compared to the same period last year was primarily due to increased employee related costs and shipping costs. Compensation costs increased in the first nine months of fiscal 2012 compared to the same period in fiscal year 2011 largely as a result of increases in commissions and employee incentives due to increased net sales and the financial results during the first nine months of fiscal year 2012. Shipping costs also increased as net sales increased.

Royalty Income, Net

We recognized royalty income, net of royalty and related expenses, totaling $310,000 during the first nine months of fiscal year 2012, compared to royalty income, net of royalty and related expenses, totaling $645,000 during the same period last year. The decrease in royalty income, net, when comparing the two periods, is primarily due to the expiration of certain patents during the first nine months of fiscal year 2012, which had previously generated a large portion of our royalty income. As a result, we expect to see the trend of declining royalty income continue during the remainder of fiscal year 2012, and we expect amortization of intangible assets expense to continue to decline as well.

Royalty income, net is partially offset by the expense of the amortization of the intangible assets associated with our royalty income, net (as further described in the Amortization of Intangible Assets section included herein), resulting from the required write-up of intangible assets to fair value when acquired as part of the acquisition of SMP Data Communications on May 30, 2008.

Amortization of Intangible Assets

We recognized $101,000 of amortization expense, associated with intangible assets, for the first nine months of fiscal year 2012, compared to amortization expense of $323,000 during the first nine months of fiscal year 2011. 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, 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 in the first nine months of fiscal year 2012 of $431,000 compared to $460,000 in the first nine months of fiscal year 2011. Other expense, net is comprised of interest income, interest expense and other miscellaneous items which may fluctuate from period to period.

Income Before Income Taxes

We reported income before income taxes of $3.3 million for the first nine months of fiscal year 2012 compared to $451,000 for the first nine months of fiscal year 2011. This increase was primarily due to the increase in gross profit of $4.9 million in the first nine months of fiscal year 2012, partially offset by the increase in SG&A expenses of $2.0 million, compared to the same period in 2011.

Income Tax Expense

Income tax expense totaled $1.1 million in the first nine months of fiscal year 2012 compared to $174,000 for the same period in fiscal year 2011. Our effective tax rate for the first nine months of fiscal year 2012 was 32.2% compared to 38.7% for the first nine months of fiscal year 2011.

Generally, 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 nine months of fiscal year 2012 was $2.3 million compared to $430,000 for the first nine months of fiscal year 2011. This increase was due primarily to the increase in income before taxes of $2.9 million in the first nine months of fiscal year 2012, compared the same period in fiscal year 2011.

Financial Condition

Total assets increased $4.1 million, or 9.0%, to $49.0 million at July 31, 2012, from $44.9 million at October 31, 2011. This increase was primarily due to a $2.6 million increase in trade accounts receivable, net and a $2.5 million increase in inventories. The increase in trade accounts receivable, net largely resulted from the increase in net sales in the third quarter of fiscal year 2012 when compared to the fourth quarter of fiscal year 2011. The increase in inventories is largely due to efforts to support an increase in sales orders and a wider variety of stocked products, as well as the timing of raw material purchases.

Total liabilities increased $2.1 million, or 12.2%, to $19.3 million at July 31, 2012, from $17.2 million at October 31, 2011. The increase in total liabilities was primarily due to a $1.3 million increase in note payable to bank under our revolving line of credit, a $438,000 increase in income taxes payable due to the financial results of the first nine months of fiscal year 2012 and a $492,000 increase 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.

Total shareholders’ equity attributable to OCC at July 31, 2012 increased $2.0 million in the first nine months of fiscal year 2012. The increase resulted from the net income attributable to OCC of $2.3 million and share-based compensation, net of $902,000, partially offset by the repurchase and retirement of 200,000 shares of our common stock for $876,000 and dividends declared of $294,000.

Liquidity and Capital Resources

Our primary capital needs during the first nine months of fiscal year 2012 have been to fund working capital requirements and capital expenditures as well as the repurchase and retirement 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 July 31, 2012, we had an outstanding loan balance under our revolving credit facility totaling $1.3 million. As of October 31, 2011, we had no outstanding balance under our revolving credit facility. As of July 31, 2012 and October 31, 2011, we had outstanding loan balances associated with our long-term debt totaling $8.0 million and $8.2 million, respectively.

Our cash totaled $1.2 million as of July 31, 2012, an increase of $115,000, compared to $1.1 million as of October 31, 2011. The increase in cash for the nine months ended July 31, 2012 primarily resulted from cash provided by operating activities of $1.1 million, partially offset by capital expenditures totaling $774,000 and net cash used in financing activities of $143,000.

On July 31, 2012, we had working capital of $27.2 million compared to $23.3 million on October 31, 2011. The ratio of current assets to current liabilities as of July 31, 2012 was 4.0 to 1 compared to 3.8 to 1 as of October 31, 2011. The increase in working capital and the improved ratio of current assets to current liabilities as of July 31, 2012 compared to October 31, 2011 was primarily the result of the $2.6 million increase in trade accounts receivable, net and the $2.5 million increase in inventories.

Net Cash

Net cash provided by operating activities was $1.1 million in the first nine months of fiscal year 2012, compared to $966,000 in the first nine months of fiscal year 2011. Net cash provided by operating activities during the first nine months of fiscal year 2012 primarily resulted from net income of $2.2 million, plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation, amortization and accretion of $1.6 million and share-based compensation expense of $1.1 million. All of the aforementioned factors positively affecting cash provided by operating activities were partially offset by increases in trade accounts receivable of $2.6 million and increases in inventories of $2.5 million. Net cash provided by operating activities during the first nine months of fiscal year 2011 primarily resulted from net income of $276,000, plus net adjustments to reconcile net income to net cash provided by operating activities, including depreciation, amortization and accretion of $2.0 million and share-based compensation expense of $644,000. Additionally, decreases in trade accounts receivable of $482,000 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 increases in inventories of $1.3 million and the decrease in accounts payable and accrued expenses (including accrued compensation and payroll taxes) of $859,000.

Net cash used in investing activities totaled $838,000 in the first nine months of fiscal year 2012 compared to $1.2 million in the first nine months of fiscal year 2011. Net cash used in investing activities during the first nine months of fiscal years 2012 and 2011 resulted primarily from purchases of property and equipment and deposits for the purchase of property and equipment.

Net cash used in financing activities totaled $143,000 in the first nine months of fiscal year 2012 compared to $1.1 million in the first nine months of fiscal year 2011. Net cash used in financing activities in the first nine months of fiscal year 2012 resulted primarily from the repurchase and retirement of 200,000 shares of our common stock for $876,000 and the $258,000 payment of dividends previously declared, partially offset by proceeds from a note payable to our bank under our line of credit, net of repayments, of $1.3 million. Net cash used in financing activities in the first nine months of fiscal year 2011 resulted primarily from the repurchase and retirement of 183,025 shares of our common stock for $846,000.

Credit Facilities

On May 30, 2008, we established $17.0 million in credit facilities (collectively, the “Credit Facilities”) with Valley Bank to provide for our working capital needs and to finance the acquisition of SMP Data Communications. The Credit Facilities provided a working capital line of credit (the “Revolving Loan”), a real estate term loan (the “Virginia Real Estate Loan”), a supplemental real estate term loan (the “North Carolina Real Estate Loan”), and a capital acquisitions term loan (the “Capital Acquisitions Term Loan”). The Capital Acquisitions Term Loan was fully funded in fiscal year 2008 and repaid in fiscal year 2009. Therefore, the $2.3 million portion of the credit facility related to the Capital Acquisitions Term Loan is no longer available. On April 30, 2010, we entered into a revolving credit facility with SunTrust Bank (further described below) which replaced the Valley Bank Revolving Loan.

On April 22, 2011, OCC and Valley Bank entered into a Third Loan Modification Agreement (the “Agreement”) to the credit agreement dated May 30, 2008 entered into between the Company, Superior Modular Products Incorporated and Valley Bank. Under the Agreement, the interest rate and the applicable repayment installments of the Virginia Real Estate Loan and the North Carolina Real Estate Loan were revised and the maturity date of the loans was extended. The fixed interest rate of the two term loans was lowered to 5.85% from 6.0%, and the maturity date of the loans was extended from June 1, 2013 to April 30, 2018.

On August 31, 2012, subsequent to our fiscal third quarter, we entered into a Fifth Loan Modification Agreement with Valley Bank whereby the fixed interest rate of the two term loans was lowered to 4.25% from 5.85% and the applicable repayment installments were revised. The maturity date of the loans did not change.

The Virginia Real Estate Loan was fully funded on May 30, 2008. The Virginia Real Estate Loan, as modified, accrues interest at 5.85% and payments of principal and interest are based on a 25 year amortization. Payments on the Virginia Real Estate Loan will be made in 83 equal installments of principal and interest in the amount of $41,686 beginning May 1, 2011. The balance of the Virginia Real Estate Loan will be due April 30, 2018. As of July 31, 2012, we had outstanding borrowings of $6.0 million under our Virginia Real Estate Loan.

The North Carolina Real Estate Loan was fully funded on May 30, 2008. The North Carolina Real Estate Loan, as modified, accrues interest at 5.85% and payments of principal and interest are based on a 25 year amortization. Payments on the North Carolina Real Estate Loan will be made in 83 equal installments of principal and interest in the amount of $14,366 beginning May 1, 2011. The balance of the North Carolina Real Estate Loan will be due April 30, 2018. As of July 31, 2012, we had outstanding borrowings of $2.1 million under our North Carolina Real Estate Loan.

On April 30, 2010, we entered into a revolving credit facility with SunTrust Bank consisting of a Commercial Note and Agreement to Commercial Note under which SunTrust Bank provides us with a revolving line of credit for our working capital needs (the “Commercial Loan”), which replaced the Valley Bank Revolving Loan. The Commercial Loan was due to mature on May 31, 2012. On July 25, 2011, we entered into a binding letter of renewal with SunTrust Bank of the commercial note extending the Commercial Loan to May 31, 2013. Concurrently with the renewal, we also entered into a Fourth Loan Modification Agreement with Valley Bank to amend the definition of ‘SunTrust Debt’ to provide for the extension of the revolver’s maturity date. On July 25, 2012, we entered into a binding letter of renewal with SunTrust Bank of the commercial note further extending the Commercial Loan to May 31, 2014.

The Commercial Loan provides us the ability to borrow an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $6.0 million, or (ii) the sum of 85% of certain receivables aged 90 days or less plus 35% of the lesser of $1.0 million or certain foreign receivables plus 25% of certain raw materials inventory. Within the Revolving Loan Limit, we may borrow, repay and reborrow, at any time until May 31, 2014.

Advances under the Commercial Loan accrue interest at the greater of (x) LIBOR plus 2.0%, or (y) 3.0%. Accrued interest on the outstanding principal balance is due on the first day of each month, with all then outstanding principal, interest, fees and costs due at the Commercial Loan Termination Date of May 31, 2014.

As of July 31, 2012, we had $1.3 million of outstanding borrowings on our Commercial Loan and approximately $4.7 million in available credit.

The Commercial Loan is secured by a first priority lien on all of our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper. The Virginia Real Estate Loan and the North Carolina Real Estate Loan are secured by a first priority lien on all of our personal property and assets, except for our inventory, accounts, general intangibles, deposit accounts, instruments, investment property, letter of credit rights, commercial tort claims, documents and chattel paper, as well as a first lien deed of trust on our real property.

Capital Expenditures

As of July 31, 2012, we have committed approximately $1.1 million to add new manufacturing equipment at our fiber optic cable production facility in order to support increased demand for our fiber optic cable products. Of the $1.1 million committed, we have spent approximately $151,000 as of July 31, 2012. We did not have any other material commitments for capital expenditures as of July 31, 2012. During our 2012 fiscal year budgeting process, we included an estimate for capital expenditures for the fiscal year of $2.5 million. This budget includes estimates for capital expenditures for new manufacturing equipment, improvements to existing manufacturing equipment, new information technology equipment and software, upgrades to existing information technology equipment and software, furniture and all other capitalizable expenditures for property, plant and equipment. These expenditures will be funded out of our working capital or borrowings under our credit facilities. Capital expenditures are reviewed and approved based on a variety of factors including, but not limited to, current cash flow considerations, the expected return on investment, project priorities, impact on current or future product offerings, availability of personnel necessary to implement and begin using acquired equipment, and economic conditions in general. Historically, we have spent less than our budgeted capital expenditures in any given year.

Corporate acquisitions and other strategic investments are considered outside of our annual capital expenditure budgeting process.

Future Cash Flow Considerations

We believe that our future cash flow from operations, our cash on hand and our existing credit facilities will be adequate to fund our operations for at least the next twelve months.

From time to time, we are involved in various claims, legal actions and regulatory reviews arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.

Seasonality

Historically, net sales are relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year, which we believe may be partially due to construction cycles and budgetary considerations of our customers. For example, our trend has been that an average of approximately 45% of our net sales occurred during the first half of the fiscal year and an average of approximately 55% of our net sales occurred during the second half of the fiscal year for the past ten fiscal years, excluding fiscal years 2002 and 2009. Fiscal years 2002 and 2009 are excluded because we believe net sales did not follow this pattern due to overall economic conditions in the industry and/or in the world during these years.

As a result, we typically expect net sales to be relatively lower in the first half of each fiscal year and relatively higher in the second half of each fiscal year. We believe this historical seasonality pattern is generally indicative of an overall trend and reflective of the buying patterns and budgetary cycles of our customers. However, this pattern may be substantially altered during any quarter or year by the timing of larger projects, other economic factors impacting our industry or impacting the industries of our customers and end-users and macro-economic conditions. While we believe seasonality may be a factor that impacts our quarterly net sales results, we are not able to reliably predict net sales based on seasonality because these other factors can also substantially impact our net sales patterns during the year.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based on the condensed consolidated financial statements and accompanying condensed notes that have been prepared in accordance with

U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 1 to the consolidated financial statements filed with our Annual Report on Form 10-K for fiscal year 2011 provides a summary of our significant accounting policies. Those significant accounting policies detailed in our fiscal year 2011 Form 10-K did not change during the period from November 1, 2011 through July 31, 2012.

New Accounting Considerations

There are no new accounting standards issued, but not yet adopted by us, which are expected to be applicable to our financial position, operating results or financial statement disclosures.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed and summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

Our management evaluated, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2012. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of July 31, 2012 and that there were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter ended July 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.